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«Paul M. Collier Aston Business School, Aston University Accounting for Managers Accounting for Managers: Interpreting accounting information for ...»

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6.4 National Retail Stores has identified the following data from its accounting records for the year ended 31 December: sales £1,100,000; purchases £650,000;

expenses £275,000. It had an opening stock of £150,000 and a closing stock of £200,000.

Calculate the:

ž gross profit; and ž operating profit.

6.5 What is the impact of the following prepayment, accrual and provision transactions on profit, the Balance Sheet and cash flow?

a A business has 24 motor vehicles that it leases in return for a monthly payment, excluding insurance. The company’s financial year is 1 April/31 March, but the annual insurance premium of £400 per vehicle for the calendar year January–December is due for payment on 31 December.

b A business budgets for energy costs of £6,000 per annum over its financial year 1 January/31 December. Bills for usage are sent each quarter on the last days of each of February, May, August and November. Historically, 70% of the annual energy cost is spent during the autumn and winter (September–February).

QUESTIONS 385 c A business with a financial year of 1 April/31 March purchases a new computer network server for £12,000 on 30 June. The business depreciates computer hardware at the rate of 20% of cost per annum, beginning the month following purchase.

6.6 Jones and Brown Retail Stationery sells its products to other businesses. It

has provided the following information:

–  –  –

Using 250 days as the number of days the business is open, calculate:

ž the days’ sales outstanding;

ž the stock turnover; and ž the days’ purchases outstanding.

Questions for Chapter 7

7.1 Following are the accounts for Drayton Ltd (Tables A1.1 and A1.2).

Calculate the following ratios for Drayton for both 2001 and 2000:

–  –  –

ž Return on shareholders’ investment (ROI).

ž Return on capital employed (ROCE).

ž Operating profit/sales.

ž Sales growth.

ž Gearing.

ž Asset turnover.

Draw some conclusions from the change in the ratios over the two years.

7.2 Jupiter Services has produced some financial ratios for the past two years.

Use the ratios that have already been calculated to draw some conclusions about


–  –  –

Questions for Chapter 8

8.1 Plastic Emoluments has a relevant range between 100,000 and 200,000 units, fixed costs are £645,000 and variable costs are £7 per unit. Calculate the average costs at a production volume of each of 100,000, 150,000 and 200,000 units.

8.2 Hilltop Solutions has a planned level of activity of 150,000 units, fixed costs are £300,000 and variable costs are £7 per unit. The actual production volume is 140,000 units.

Identify the:

ž standard cost per unit;


ž actual cost per unit;

ž marginal cost per unit.

8.3 Corporate Document Service incurs variable costs of £7 every time a document is processed. The business providing the service has fixed costs of £100,000 per month. The selling price for each service is £25.

ž By how much does the average cost change between processing 10,000 and 20,000 documents?

ž Does the marginal cost change in the same way?

ž Explain why the average cost changes.

8.4 The Cook Co. has two divisions, Eastern and Western. The divisions have

the following revenue and expenses:

–  –  –

The management of Cook is considering the closure of the Eastern division sales office. If the Eastern division were closed, the fixed costs associated with this division could be avoided but allocated corporate costs would continue.

Given this data:

ž Calculate the effect on Cook Co.’s operating profit before and after the closure.

ž Should the Eastern division be closed?

Jacobean Creek PLC has provided the following data for last year:


–  –  –

For the current year, Jacobean Creek believes that although sales volume will remain constant, the contribution margin per unit can be increased by 20% and total fixed cost can be reduced by 10%.

ž Calculate the operating profit for last year and the current year.

ž What is the increase in profit between the two years?

–  –  –

Co.’s total operating profit if the special order were accepted in addition to the planned sales at full price?

8.7 Yorkstar plans for a profit of £40,000 and expects to sell 20,000 units. Variable cost is £8 per unit and total fixed costs are £100,000. Calculate the selling price per unit.

8.8 Jasper’s IT consultancy has fixed costs of £450,000 per annum. There are 10,000 hours billed on average per annum. If variable costs are £35 per hour, calculate the breakeven charge rate per hour.

8.9 Hong Long Ltd has a product that is sold for £75, variable costs are £30 and fixed costs are £1,000 per month. Calculate how many products need to be sold to obtain a profit of £10,000 per annum.

8.10 John Richards PLC has a cost per unit of £10 and an annual volume of sales of 18,000 units. If a £200,000 investment is required and the target rate of return is 12%, calculate the target mark-up per unit.

8.11 Victory Sales Co. predicts its selling price to be £20 per unit. Estimated costs are direct materials £8 per unit, direct labour £5 per unit and fixed overhead £7,000.

Calculate the number of units to be sold to generate a profit of £5,000.

Luffer Enterprises estimates the following demand for its services at 8.12 different selling prices. All demand is within Luffer’s relevant range. Variable costs are £15 per unit and fixed costs are £10,000.

–  –  –

Calculate the level of sales that will generate the highest profit.

8.13 Godfrey Consultancy adopts a cost-plus pricing system for its services and applies a target rate of return of 25% on an investment of £750,000. Its labour costs are £25 per hour and other variable costs are £4 per hour. The consultancy anticipates charging 20,000 hours per year to clients and has fixed overheads of £250,000.

Calculate Godfrey’s target selling price per hour.

8.14 The marketing department of Giggo Hotels has estimated the number of hotel rooms (it has 120) that could be sold at different price levels. This information


–  –  –

Giggo Hotels has estimated its variable costs at £25 per room per night. Calculate the occupancy rate that Giggo will need in order to maximize its profits.

Questions for Chapter 9

The following data relate to activity and costs for two recent months:


–  –  –

Assuming that both activity levels are within the relevant range, calculate for

December the:

ž variable costs;

ž fixed costs;

ž semi-variable costs.

Maxitank makes two products. Its costs are:


–  –  –

9.3 Goldfish Enterprises’ costs for selling 15,000 hours of consultancy services are £345,000 and costs for 7,000 hours are £185,000. The company wishes to estimate its fixed and variable costs.

ž What are the fixed and variable costs for Goldfish?

ž What is the principal assumption behind your calculation?

Midlands Refrigeration estimates the costs per unit of a product as:

9.4 Direct materials 40 kg @ £2.50 per kg Direct labour 7 hours machining @ £12 per hour 4 hours finishing @ £7 per hour Variable production overhead @ £5 per direct labour hour Fixed production overhead of £1,000,000 based on a production volume of 12,500 units.

Calculate the:

ž variable production cost;

ž total production cost.

9.5 Harrison Products’ capacity is 20,000 units a year. A summary of operating

results for last year is:

Sales (12,000 units @ £100) £1,200,000 Variable costs 588,000

–  –  –

A foreign distributor has offered to buy a guaranteed 8,000 units at £95 per unit next year. Harrison expects its regular sales next year to be 15,000 units.

If Harrison accepts this offer and forgoes some of its expected sales to ensure that it does not exceed capacity, what would be the total operating profit next year assuming that total fixed costs increase by £100,000?

9.6 Global Conglomerates has a new product that requires 150 kg of material Y876, which is in constant use within the firm. There are 100 kg in stock that cost £11.00/kg. The replacement value is £12.50/kg and the scrap value is £2.00/kg.

Calculate the relevant cost of the material to be used in the new product.

9.7 Magnificent Products makes three products, each requiring two machine hours per unit to produce. The following information has been provided by the

Sales Dept in relation to each product:

Macro Mezzo Micro Budgeted sales units 10,000 7,500 5,000 Selling price per unit £12 £16 £18 Variable costs per unit £6 £7 £4


If the company has a limited production capacity, preventing all its budgeted sales from being produced, how should Magnificent rank its products for manufacture in order to maximize profitability?

9.8 CarParts has a new automotive product that is in the final stages of design.

Marketing expects to achieve the desired market share and volume at a price of £29 per unit and the manufacturer expects a 25% margin on the selling price. Current designs have been calculated to result in a production cost of £22.50 per unit.

Calculate the reduction required to meet the target cost per unit.

9.9 Buena Manufacturing has sales of £850,000. It used materials of £450,000, direct labour of £175,000 and incurred other variable manufacturing expenses of £30,000. The business also incurred fixed manufacturing expenses of £65,000 and selling and administrative expenses of £40,000. Its opening stock of finished goods was £120,000 and its closing stock had reduced by £25,000.

Calculate each of the:

ž cost of production;

ž cost of sales;

ž contribution margin; and ž operating profit.

Questions for Chapter 10

10.1 Grant & McKenzie is a firm of financial advisers that needs to calculate an hourly rate to charge customers for its services.

The average salary cost for its advisers is £40,000. National Insurance is 11% and the firm pays a pension contribution of 6%. Each adviser has four weeks’ annual holiday and there are 10 days per annum when the firm closes for bank holidays and Christmas. Each adviser is expected to do chargeable work for clients of 25 hours per week, the remainder of the time being administrative work.

Calculate an hourly rate (to the nearest hour) to cover the cost of each financial adviser.

10.2 Local Bank does not know how much of its cheque-processing costs are fixed and how much are variable. However, total costs have been estimated at £750,000 for processing of 1,000,000 transactions and £850,000 for processing of 1,200,000 transactions.

ž What are the variable costs per transaction?

ž What are the fixed costs?

–  –  –

The cost to buy the part from the Oriole Co. is £36. If Cardinal buys the part from Oriole instead of making it, Cardinal would have no use for the spare capacity. Additionally, 60% of the fixed manufacturing overheads would continue regardless of what decision is made. Cardinal decides that direct labour is an avoidable cost for the purposes of this decision.

Decide whether to make or buy the 20,000 parts, by comparing the relevant costs.

10.4 Cirrus Company has calculated that the cost to make a component is made up of direct materials £120, direct labour £60, variable overhead £30 and fixed overhead of £25. Another company has offered to make the component for £140.

If the company has spare capacity and wishes to retain its skilled labour force, should it make or buy the component?

10.5 Bromide Partners provides three services: accounting, audit and tax. The total business overheads of £650,000 have been divided into two cost pools. The

cost pools are:

Partners £200,000 Juniors £450,000 Partner hours are a measure of complexity and junior hours define the duration of

the work. The hours spent by each type of staff are:

–  –  –

Calculate the total activity-based cost of providing audit services.

10.6 Bendix Ltd is considering the alternatives of either purchasing component VX-1 from an outside supplier or producing the component itself. Production costs

to Bendix are estimated at:

–  –  –

An outside supplier, Cosmo PLC, has quoted a price of £1,000 for each VX-1 for an order of 100 of these components. However, if Bendix accepts the quote from Cosmo, the company will need to give three months’ notice of redundancy to staff.

ž Calculate the relevant costs of the alternative choices (show your workings) and make a recommendation to management as to which choice to accept.

ž How would your recommendation differ if Bendix employees were on temporary contracts with no notice period?

ž Explain the significance of a stock valuation of £1,300 for the VX-1 at the end of the last accounting period.

10.7 Victory Products Ltd manufactures high-technology products for the computer industry. Victory’s accountant has produced a profit report showing the profitability of each of its three main customers for last year (Table A1.3).

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