Deck 9: Relevant Costs, Marginal Costing and Decision Making

Question 1

Which of the following statements does not describe contribution?

A) The surplus that arises from the production and sale of one unit of product or service.
B) The profit that is left over once all the costs of the producing or service organization have been deducted from sales revenue.
C) The marginal revenue generated from selling and producing one more unit of product or service.
D) The selling price less all the variable costs of production.

Answer 1

B

Question 2

Selling price - total costs = contribution

Answer 2

False

Question 3

Contribution = selling price - variable costs

Answer 3

True

Question 4

The directors of BB Limited are quoting for a construction contract and are drawing up a list of the expected costs for the contract. Which one of the following costs is not a relevant cost for this quotation?

A) The firm's own plant and machinery bought four years ago for £35,000 and which will be used on site during the construction contract.
B) Crane hire at a daily rate of £500 which will be charged to the business on this contract.
C) Spare materials that can be sold for £600.
D) The £10 hourly rate paid to the workforce on the basis of the number of hours worked on a job.

Question 5

In decision making, irrelevant costs are those costs that will not change as a result of a decision being made to follow a certain course of action.

Question 6

Which of the following costs are relevant costs in short term decision making? Please select all that apply.

A) Fixed costs
B) Opportunity costs
C) Sunk costs
D) Variable costs

Question 7

TVA Limited has a set of 25 fencing panels. It plans to use these fencing panels to build a new fence for a customer. The invoice price for the new fence is £1,500. The fencing panels originally cost £400 but they could be sold today for £500. The cost of replacing the fencing panels is £450. What is the opportunity cost of these fencing panels?

A) £400
B) £450
C) £500
D) £1,500

Question 8

Opportunity cost is the next best alternative price that can be paid for a product or service.

Question 9

Your audit firm has been approached by a large company with a view to appointing your firm as its auditor at the next annual general meeting. You are considering the costs that you will incur in taking on this new audit client in order to quote an expected fee for the audit for next year. Which one of the following is not a relevant cost in drawing up this audit fee quote?

A) Overnight accommodation for staff staying away from home in order to audit the large company's branch operations.
B) The cost of audit software that is already used as standard by the firm on all its existing audit assignments.
C) The services of a tax expert that will have to be bought in to deal with certain complex tax issues in the large company.
D) Additional time used on the audit by existing staff members that will have to be paid as overtime.

Question 10

Which one of the following statements is not correct?

A) Opportunity costs are only considered when resources are limited.
B) Short term decision making is all about analysing those costs that will change as a result of taking a particular course of action.
C) Contribution analysis is used to determine how many units of a product or service a business has to sell in order to cover all the costs of the business.
D) Both fixed and variable costs influence future short term decision making.

Question 11

Which one of the following describes sensitivity analysis in the context of break-even point?

A) Enables us to determine how far our sales can fall before we reach break-even point.
B) Enables us to determine the profit or loss from any given level of sales.
C) Enables us to calculate the level of sales required to achieve a given level of profit.
D) Enables us to decide whether it is more cost effective to buy goods and services from external parties or to produce or deliver those goods and services within the organization.

Question 12

Which one of the following describes the way in which limiting factor analysis uses contribution and relevant cost analysis?

A) Total fixed costs divided by contribution per unit of sales.
B) Using relevant cost and contribution analysis to determine whether accepting an order to supply goods at lower than the usual selling price will increase or decrease overall profit.
C) Using relevant cost analysis to determine whether it is more cost effective to produce products inside an organization or to buy them in from outside.
D) Calculating the contribution per unit of a scarce resource to determine the profit maximizing production plan.

Question 13

Which one of the following uses contribution and relevant cost analysis to determine the profit or loss at any given level of sales?

A) Sensitivity analysis
B) Break-even analysis
C) Margin of safety
D) Target profit

Question 14

Angela sets up in business making teddy bears. Materials cost £3 per bear, employees are paid £2 for each bear produced and there are packaging costs of £1 for each bear. The fixed costs of Angela's teddy bear workshop amount to £25,000 per annum. Each bear sells for £10. Angela's aim is to sell 15,000 teddy bears in her first year of operations. What is Angela's break-even point in terms of the number of teddy bears sold?

A) 2,500
B) 5,000
C) 6,250
D) 15,000

Question 15

Aisha sells cutlery sets for £120 per set. Variable costs of production are £72 and the fixed costs per cutlery set are £6 based on the expectation that the normal level of production will be 42,000 cutlery sets per annum. A sales commission of £3 is paid to the company's sales representatives for every cutlery set sold. What is Aisha's break-even point in sales?

A) 5,250
B) 5,600
C) 6,000
D) 6,462

Question 16

Chiara and Co, a firm of accountants, employs 4 qualified accounting staff at an annual salary cost of £45,500 each. Each accountant works 1,820 hours in a year. Some of these hours are spent on administrative and business development activities which the accounting firm cannot charge to the clients. The firm charges clients £40 for each hour that each accountant spends working on the clients' accounts, tax returns and on general business advice. The firm has fixed overhead costs of £87,000 per annum. What is Chiara and Co's break-even point in hours?

A) 2,175 hours.
B) 3,480 hours
C) 5,800 hours.
D) 7,280 hours.

Question 17

The BV hotel has 50 rooms and is open for 360 days a year, giving a total number of room nights of 50 x 360 = 18,000. The charge for each room is £80 per night and the variable costs of each night's stay are £20 plus breakfast costing £10. Total fixed costs of the hotel are £540,000 per annum. What is the break-even point in room nights?

A) 6,750
B) 9,000
C) 10,800
D) 18,000

Question 18

Which one of the following statements about break-even point is incorrect?

A) Break-even point = the point at which revenue from sales = the variable costs of the business.
B) Break-even point = total fixed costs ÷ contribution per unit of sales.
C) Break-even point = the point at which a £nil profit and £nil loss result.
D) Break-even point = the number of units of production and sales that will cover all the business' costs.

Question 19

Which of the following costing techniques do not employ knowledge of the break-even point?
Please select all that apply.

A) Limiting factor analysis
B) Sensitivity analysis
C) Make or buy decisions
D) Special orders

Question 20

WS Limited currently sells 15,000 bookshelves at £50 each. For each bookshelf, direct materials cost £15, direct labour costs £17.50 and variable overheads cost £2.50. WS Limited's fixed costs total up to £105,000. What is the margin of safety for WS Limited in number of bookshelves?

A) 7,000 bookshelves
B) 8,000 bookshelves
C) 22,000 bookshelves
D) 23,000 bookshelves

Question 21

Dino and Co, a firm of accountants, employs 6 qualified accounting staff at an annual salary cost of £53,625 each. Each accountant works 1,950 hours in a year. Of the 11,700 available hours in the year, 11,400 are spent on work that is chargeable to the clients. Dino and Co charges clients £50 for each hour that each accountant spends working on the clients' accounts, tax returns and on general business advice. The firm has fixed overhead costs of £202,500 per annum. What is Dino and Co's margin of safety in hours?

A) 2,400 hours.
B) 2,700 hours
C) 7,350 hours.
D) 9,000 hours.

Question 22

Rupinder sells crockery sets for £80 per set. Variable costs of production are £38 and the fixed costs per crockery set are £6 based on the expectation that the normal level of production and sales will be 34,000 crockery sets per annum. A sales commission of £2 is paid to the company's sales representatives for every crockery set sold. What is Rupinder's margin of safety?

A) 5,100
B) 6,000
C) 28,000
D) 28,900

Question 23

The Lake View hotel has 60 rooms and is open for 360 days a year, giving a total number of room nights of 60 x 360 = 21,600. The charge for each room is £90 per night and the variable costs of each night's stay are £25 plus breakfast costing £10. Total fixed costs of the hotel are £715,000 per annum. The hotel has an occupancy rate of 80% each year. What is the margin of safety for the Lake View hotel in room nights?

A) 4,280
B) 8,600
C) 13,000
D) 17,280

Question 24

The higher the margin of safety, the more likely it is that a business will make a loss.

Question 25

GF Limited makes and sells mini greenhouses for £80 each. The direct material component of each mini greenhouse costs £40, direct labour makes up £15 of the variable cost and variable overheads total up to £5. GF Limited has annual fixed costs of £54,000. A commission of £2 per mini greenhouse is paid to the sales representative for each sale achieved. GF Limited currently has sales of 5,000 mini greenhouses. Calculate the profit that GF Limited will make if 4,000 mini greenhouses are sold.

A) £18,000
B) £26,000
C) £36,000
D) £46,000

Question 26

Podcaster University Press produces and sells a text book which provides comprehensive coverage of International Financial Reporting Standards. The book generates a contribution of £30 and each book is allocated a fixed overhead charge of £10 to give a profit of £20 on each book produced and sold. Fixed overheads for the book total up to £27,000 per annum. Podcaster University Press is experiencing a fall in demand for this book and expected sales have fallen from 2,700 to 1,200 books. Using sensitivity analysis, what is the profit or loss that Podcaster University Press will make from selling 1,200 copies of this book?

A) A loss of £3,000.
B) A profit of £9,000.
C) A profit of £24,000.
D) A profit of £36,000.

Question 27

Under sensitivity analysis, profit or loss = (unit sales - break-even point) x contribution per unit.

Question 28

Sensitivity analysis uses contribution and break-even analysis to determine the profit or loss at any given level of sales. Which one of the following is the calculation used in sensitivity analysis?

A) Fixed costs divided by contribution per unit of sales.
B) Contribution per unit of sales x (unit sales - break-even point in sales units).
C) Contribution per unit of sales x (unit sales + break-even point in sales units).
D) Total sales in units - the break-even point in sales units.

Question 29

JSP produces printers. The total variable production cost of each printer amounts to £35 and each printer sells for £60. In addition to the variable production cost, a royalty payment of £1 is paid to the special chip designer for each printer sold. JSP's fixed costs total up to £480,000 per annum. JSP currently sells 25,000 printers every year. A new managing director has been appointed and she has set a target profit of £216,000 for JSP in the coming financial year. How many printers will JSP have to sell in total to achieve a target profit of £216,000?

A) 8,640
B) 9,000
C) 28,640
D) 29,000

Question 30

Vijay produces shelving units. The total variable production cost of each shelving unit is £27 and each shelving unit sells for £55. In addition to the variable production cost of each unit, a sales commission of £3 is paid to the sales staff for each shelving unit sold. Vijay allocates a fixed overhead of £10 to each shelving unit on the basis that normal annual production and sales of 21,000 shelving units are achieved. Vijay is looking to achieve a target profit of £360,000 for the next financial year. How many shelving units will Vijay need to sell in total to achieve a target profit of £360,000?

A) 14,400
B) 20,357
C) 22,800
D) 38,000

Question 31

Target profit uses contribution analysis to determine the level of sales required to achieve a certain level of profit. Which one of the following is the correct method to use to calculate target profit?

A) Fixed costs divided by contribution per unit of sales.
B) Contribution per unit of sales x (unit sales - break-even point in sales units).
C) Contribution per unit of sales x (unit sales + break-even point in sales units).
D) Total sales in units - the break-even point in sales units.

Question 32

Which of the following is not a potential problem to take into account when making decisions to outsource production of goods or services?

A) The potential loss of in-house skills and expertise in the provision of goods and services.
B) The potential for improved morale and commitment from the entity's remaining workforce resulting in higher productivity and profitability.
C) Future price increases in the cost of goods and services outsourced could cancel out any cost savings made when production was originally outsourced.
D) The potential loss of reputation if outsourced products and services are of lower quality compared to those that could be produced or provided in-house.

Question 33

Outsourcing = loss of control.

Question 34

David Limited can sell as much production as it can make of each of its products. The company is currently facing a shortage of input materials for its products and has to decide which product to produce in the next three months in order to maximize its profits. Each kilogram of input material used in all four products costs £5. The company produces four products, A, B, C and
$\begin{array}{|c|c|c|c|}\hline \text { Product } & \begin{array}{c}\text { Selling price } \\\text { per unit of } \\\text { production }\end{array} & \begin{array}{c}\text { Kilograms of } \\\text { material used } \\\text { in one unit of } \\\text { production }\end{array} & \begin{array}{c}\text { Other variable } \\\text { costs per unit } \\\text { of production }\end{array} \\\hline \text { A } & £ & \text { Kgs } & £ \\\hline \text { B } & 50 & 2 & 20 \\\hline \text { C } & 60 & 4 & 30 \\\hline \text { D } & 60 & 3 & 21 \\\hline\end{array}$
Which product should David Limited produce and sell in order to maximise profits over the next three months?

A) A
B) B
C) C
D) D

Question 35

Alex Limited manufactures 3 products, A, B and C. Product A generates a contribution of £20, product B a contribution of £30 and product C a contribution of £40. The company is currently anticipating a shortage of the necessary grade of skilled labour over the next month with the supply of this labour limited to a maximum of 4,000 hours. Product A uses 2 hours of this skilled labour per unit of production, product B uses 4 hours and product C uses 5 hours. The demand for the next month for each product is as follows: Product A: 500 units
Product B: 600 units
Product C: 700 units
What is the profit maximizing production schedule that Alex Limited should follow for the next month?

A) Zero units of product A, 125 units of product B and 700 units of product
B) 250 units of product A, zero units of product B and 700 units of product
C) 500 units of product A, 300 units of product B and 360 units of product C
D) 500 units of product A, zero units of product B and 600 units of product C

Question 36

a) Calculate the contribution maximising production schedule.
B) Calculate the quantity of limiting factor used in the production of each product.
C) Calculate the contribution per unit of limiting factor delivered by each product.
The three stages in limiting factor analysis are listed above. However, they are not currently listed in the correct order. What is the correct order which these stages should follow?

A) c, b, a
B) c, a, b
C) b, c, a
D) b, a, c

Question 37

Which one of the following statements is not an assumption of relevant cost and contribution analysis?

A) It is assumed that variable costs can be identified with the required level of precision.
B) Period fixed costs are assumed to be completely predictable and unchanging.
C) Prices are assumed to be stable.
D) Variable costs are assumed to be curvilinear and not to vary directly in line with production.

Question 38

In which one of the following situations can relevant cost and contribution analysis not be used?

A) When organizations face a shortage of resources and seek to maximize profit over the short term.
B) Making outsourcing decisions.
C) Break-even analysis involving two or more products.
D) Distinguishing between different marketing strategies involving different selling prices.

Question 39

Variable costs are assumed to be linear, that is, variable costs vary directly in line with production of goods and delivery of services. Which of the following would result in costs not behaving in a strictly linear fashion?
Please select all that apply.

A) Bulk discounts for bulk purchases of raw materials.
B) Bonus payments to production employees.
C) Stepped fixed costs.
D) Overtime payments to production employees.

Question 40

Break-even analysis is just as valid for two or more products as it is for one product.