7SSMM102 | Accounting and Finance

Cost Concepts, Cost-Volume-Profit Analysis and Marginal Analysis

Tutorial Questions

Question 1

Part 1
Jane is thinking of starting a business making pancakes from a market stall on Guildford High Street
on Farmers’ market day. The following information applies:
Cost of hiring trailer for 1 day £140
Cost of hiring the space on the High Street for 1 day £160
Estimated sales price £2.2 per regular pancake
Estimated cost of mix to make a regular pancake is £0.2.

Calculate the following:

(a) Break-even in units.
(b) If the target profit is £100 how many pancakes need to be sold?
(c) The margin of safety if 250 pancakes are sold.
(d) What does the selling price per pancake need to be if Jane expects to sell 250 units and wants
to make a profit of £250?
(e) How many additional pancakes need to be sold to cover £100 of advertising expenditure?

Part 2
As well as the regular pancake Jane now intends to introduce a large pancake. The following details
apply:
The regular sell for £2.2 and the large for £3.4.
The regular needs 1 egg for the mix and the cost of the mix is £0.2. The large needs 2 eggs per mix and
the cost of the mix is £0.4.
The cost of the trailer and space hire are as before (£140 and £160).
The demand per day for the pancakes is:
Regular 180 pancakes
Large 100 pancakes

If Jane only has 300 eggs for the day recommend a production mix that will maximise Jane’s profit and
calculate the resulting profit.

Dr Soheila Malekpour, King’s Business School, King’s College London Page 1 of 7

Question 2

Lee Enterprises operates in the leisure and entertainment industry and one of its activities is to
promote concerts at locations throughout the word. The company is examining the viability of a
concert in Singapore. Estimated fixed costs are £60,000. These include the fees paid to performers,
the hire of the venue and advertising costs. variable costs consist of the cost of a pre-packed buffet
that will be provided by a firm of caterers at a price which is currently being negotiated, but it is likely
to be in the region of £10 per ticket sold. The proposed price for the sale of a ticket is £20. The
management of Lee have requested the following information:
(a) The number of tickets that must be sold to break even (that is, the point at which there is
neither a profit nor loss).
(b) How many tickets must be sold to earn £30,000 target profit?
(c) What profit would result if 8,000 tickets were sold?
(d) What selling price would have to be charged to give a profit of £30,000 on sales of 8,000
tickets, fixed costs of £60,000 and variable costs of £10 per ticket?
(e) How many additional tickets must be sold to cover the extra cost of television advertising of
£8,000?
(f) At the price of £20 per ticket, the expected sales would be 8,000 tickets. One of the managers
has suggested that if the selling price per ticket is reduced by 10%, with an extra advertising
cost of £20,000, the sales volume would increase by 30%. Should this option be undertaken?
(g) At the price of £20 per ticket, the expected sales would be 8,000 tickets. If Lee Enterprises
pays sale staff a commission of 5% of sales price per ticket, the sales volume is expected to
increase by 2,000 tickets. Should this option be undertaken?

Question 3

Murray Ltd is a company offering corporate packages to major tennis events. The company is
examining the viability of organising a trip to the US open tournament in New York in 20X3. Estimated
fixed costs are £30,000 and this includes advertising in tennis magazines and fees paid for the hire of
a private marquee at the venue.

Variable costs consist of the following:

Return flight to the USA at £600 per person
Entry cost for the event £200 per person
Accommodation at £250 per person
Lunch and tea provided in the marquee at the course £50 per person

The proposed price for the sale of a ticket for 1 person is £1,500.

Required:
(a) The number of tickets that must be sold to break even
(b) How many tickets must be sold to earn a profit of £10,000?
(c) What is the C/S ratio?

Dr Soheila Malekpour, King’s Business School, King’s College London Page 2 of 7

 (d) What profit would result if 90 tickets were sold?
(e) What is the margin of safety, expressed as a percentage, if 90 tickets are sold?
(f) How many additional tickets must be sold to cover the extra cost of £8,000 of employing a
famous retired tennis player to host the event?
(g) The company decides not to employ the retired tennis player and has established that at a
selling price of £1,500 and with the level of advertising currently planned the expected sales
would be 90 tickets. One of the managers has suggested that if the selling price per ticket was
reduced to £1,450, then the sales would increase to 110 tickets. To guarantee these extra
sales additional magazine advertising expenditure of £1,490 would be needed and each client
would receive a gift box of tennis ball all with the US Open logo on them which would cost the
company £15 per box. For this new strategy you are to calculate:
(i) The new break-even point in units only
(ii) The new margin of safety in units only
(iii) The new forecast profit

(h) Explain briefly if you would recommend the manager’s suggestion be implemented?
(i) Discuss the types of decisions that require knowledge of how costs and revenues vary with
different levels of activity.

Question 4

Ewing Ltd expects the following income and expenditure in 20X0:

£ £
Sales (20,000 units) 400,000
Direct materials 140,000
Direct wages 90,000
Fixed production overheads 65,000
Variable production overheads 30,000
Fixed administration overheads 50,000
Fixed selling and distribution overheads 45,000
420,000
Profit/(loss) (20,000)

Ewing Ltd has asked you for a financial evaluation of the following proposal advising whether it should
be implemented. You have been advised that direct costs are variable costs.

Proposal
Reduce selling price by 5%, which is expected to increase sales volume by 30%.

Dr Soheila Malekpour, King’s Business School, King’s College London Page 3 of 7

Question 5

XYZ Ltd makes 3 products and for the current period there is a shortage of skilled labour with only
10,000 hours available. The selling price and cost per unit for each of these products is as follows:

Product X Product Y Product Z

£ £ £
Direct materials 64 45 54
Direct labour (paid £7/hour) 56 49 70
Selling price 160 150 184

Fixed overheads for the period are £50,000.

The maximum demand for each product is:

Product X 350
Product Y 550
Product Z 480

Required:
Determine the production mix that will maximise profit in the current period and calculate the
resulting profit (assume part units can be made).

Question 6

Z Ltd manufactures three products. The selling price and cost details of which are given below:

Product X Product Y Product Z

£ £ £
Selling price per unit 75 95 95
Cost per unit:
Direct materials (£5/kg) 10 5 15
Direct labour (£8/hour) 16 24 20
Variable overhead 8 12 10
Fixed overhead 24 36 30

In a period when direct materials are restricted in supply, the most and the least profitable uses of
direct materials are:
Most profitable/Least profitable
(a) X/Z
(b) Y/Z
(c) Z/Y
(d) Y/X

Dr Soheila Malekpour, King’s Business School, King’s College London Page 4 of 7

Question 7

Question 8

Answer following critical review questions:

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Question 9

ABC Ltd manufactures and sells three products, A, B and C. All units produced are sold. A budgeted
profit statement for next month for the products are provided below:

Product A Product B Product C Total

Production and sales (units) 300 400 500 1,200
£ £ £ £
Sales revenue 16,500 28,000 40,000 84,500
Variable costs
Direct materials (£3 per kg) 8,100 6,000 6,000 20,100
Direct labour (£10 per hour) 3,000 12,000 20,000 35,000
Production overheads 600 2,400 4,000 7,000
Fixed costs
Production overheads 3,000 4,000 5,000 12,000
Administration and selling costs 2,250 3,000 3,750 9,000
Profit/loss (450) 600 1,250 1,400

All of the company’s fixed costs have been allocated based on the number of units produced and sold
but are not dependent on them.

The managing director of the company is concerned about Product A, which shows that it is losing the
company money and wants to discontinue production of it.

Required:
Advice the director on whether the decision to stop production and sales of A is the right one?

Question 10

SAM Ltd produces and sells a single product. Selling price and costs for this product is provided below:

£ per unit
Selling price 30
Costs
Direct materials (5 kg at £2 per kg) 10
Direct labour (2 hours at £6 per hour) 12
Variable overheads (2 hours at £1 per hour) 2
Fixed overheads 4
=========
Profit 2

Variable overhead varies directly with the number of direct labour hours worked and is charged at £1
per direct labour hour.

Dr Soheila Malekpour, King’s Business School, King’s College London Page 6 of 7

Total fixed overhead amount to £400,000 per annum and this has been allocated on the basis of
budgeted production of 100,000 units.

SAM Ltd has a received a one-off order for 2,000 units from MAC Ltd, who is prepared to pay a
maximum of £61,000 for the order. In addition, MAC wants some slight modifications to the product,
which will require an extra kilogram of materials as well as half an hour of extra labour hours.

Required:
If fixed costs are not expected to increase, should SAM Ltd accept this one-off contract? By how much
will profits increase or decrease as a result of accepting the contract?

Dr Soheila Malekpour, King’s Business School, King’s College London Page 7 of 7