Management Accounting for Non Specialists

1.

Which of the following is the correct description of the break-even point?

Your Answer: Where total revenue equals total variable costs

Correct Answer:

Where total revenue equals total fixed and variable costs

  At this point a business makes neither profit nor loss.

2.

In a profit-volume chart, what does the point at which the contribution line touches the vertical axis represent?

Your Answer: The break-even point

Correct Answer:

Total fixed costs

  The point represents the maximum loss at zero output that, in turn, is equal to the total fixed costs.

3.

A. Choudray (Engineering) Ltd makes a product that is sold for £53 per unit and has the following costs per unit:

  £

Variable material cost 10

Variable labour cost 24

Share of fixed costs 12

  46

The labour cost includes three hours charge for assemblers who are paid £6 per hour.

The company is considering sub-contracting the assembly work as demand for the product outstrips the ability of the business to assemble the parts that are produced to make the product.

What is the maximum price that the company should be prepared to pay to have one unit of the product assembled?

Your Answer: £19

Correct Answer:

£37

  The price per unit is £53. The variable costs excluding the assembly labour charge is £10 + £(24 – 18) = £16. Providing the payment for assembly labour does not exceed £53 - £16 = £37, the company will make a contribution to profits by sub-contracting.

4.

Which of the following best describes a fixed cost?

Your Answer: A cost that involves a long-term commitment by the business

Correct Answer:

A cost that is unaffected by the level of output

  Fixed costs are constant in relation to the level of output

5.

Lim Ltd makes two products - Knick and Knack. Details of each product are shown below:

  Knick Knack

  £ £

Selling price per unit 60 30

 

Variable labour costs (18) (6)

Variable material costs (12) (10)

Fixed costs (6) (8)

The variable material costs consist entirely of material Delta. Each Knick uses 6 kgs and each Knack uses 4 kgs of Delta. This material is in short supply.

Lim Ltd cannot vary the selling price of Knicks.

At what price must the company sell Knacks in order to ensure that each product is equally profitable?

Your Answer: £60

Correct Answer:

£36

  The contribution per unit of scarce resource for Knicks is £(60 – 30)/6 = £5.As each Knack uses 4 kgs of the scarce resource, the required contribution from this product will be £5 x 4 = £20. To achieve this contribution, the selling price must be:

£16 (variable costs) + £20 (contribution ) = £36.

6.

Tavy Ltd owns a laser-cutting machine that is used exclusively for the manufacture of Product X100. The product details are shown below:

  £ £

Selling price 40

Variable costs 15

Fixed costs 12 27

  13

The machine takes two hours to complete each product and is used to full capacity. The company has the opportunity to buy Product X 100 from another company and, if it decides to do this, it will use the machine to produce Product X 300. Details of this product are as follows:

  £ £

Selling price 50

Variable costs 40

Fixed costs 6 46

  4

This product will take one hour to produce using the laser-cutting machine.

What is the maximum price per unit that Tavy Ltd should pay to buy Product X100 from another company?

Your Answer: £27

Correct £45

Answer: 

The contribution for product X100 is £(40 - 15) = £25

The contribution for product X300 is £(50 - 40) = £10

During a two-hour period the contribution from the machine producing Product X300 will be £10 x 2 = £20.

Thus, to ensure that the same contribution as before is made, the contribution from the sale of Product X100 must be £(25 - 20) = £5. Given a selling price of £50 per unit, the maximum amount to pay must be £45.

7.

Which one of the following best describes the margin of safety?

Your Answer: The extent to which the total sales exceeds the total variable costs

Correct Answer:

The extent to which the total sales exceeds the total fixed and variable costs

8.

M.Omran Ltd offers four different products to its customers. Details (per unit) are set out below:

  Economy Standard De Luxe Super

Selling price £40 £65 £85 £100

Variable costs £20 £30 £45 £70

Fixed costs £10 £10 £25 £25

Machine time 3 hours 7 hours 10 hours 10 hours

The company can make and sell as many of each product as is possible. However, machine availability limits the ability of the company to produce the products.

Which product should the company produce in order to maximise profits?

Your Answer: De Luxe

Correct Answer:

Economy

  The Economy product gives the highest contribution per unit of scarce resource [£(40 – 20)/3 = £6.67]

9.

A variable cost is one that:

Your Answer:

is constant per unit of output irrespective of the level of output

10.

Nanyang Ltd produces a single product. The selling price is £50 per unit and the variable costs is £30 per unit. The annual fixed costs of the business are £4,000. The company aims to make £10,000 profit during the forthcoming year. How many units must be sold to achieve this target?

Your Answer:

700 units