Q1
The directors of XYplc have been analysing the performance of one of its subsidiary companies’ PD components
ltd. In an attempt to win over key customers in their industry, pd has decided to charge a price lower than its
normal price for td463 when selling to the key customers that are targeted. Details of component td463
standard costs are:
Machine group 1 Machine group 7 Machine group 29 Assembly (£)
(£) (£) (£)
Materials (per 39.00 26.00 … 4.50
unit)
Labour (per unit) 3.00 2.40 1.15 1.80
Variable 1.00 1.10 1.20 0.54
overheads (per
unit)
Fixed overheads 4.50 3.75 2.25 1.26
(per unit)
Total 47.50 33.25 4.60 8.10
Setting up costs £30.00 £18.00 £8.00 …
per batch of 200
units
a) Lowest selling price at which one batch of 200 units could be offered.
The minimum selling price should cover the incremental costs of meeting the order. It is assumed
that the labour is an incremental cost and that none of the fixed overheads would be avoidable if a
batch of 200 was not proceed.
Total cost per unit is (£) Fixed cost per unit is (£)
47.20 4.50
33.25 3.75
4.60 2.25
8.10 1.26
93.45 11.76
Therefore, the incremental cost/unit is £93.45- £11.76= £81.69
The incremental cost of a batch of 200 units is £81.69x200= £16.338 plus set up cost (£30+£18+
£8=£56) = £16.338+£56= £16.394
Extra: Checking contribution to fixed cost. If the minimum selling price for one batch of 200 units is £16.394
therefore, for 1 unit is £16.394: 200= £81.97 (min sell. price for 1 unit). Contribution to fixed costs= selling
price – variable cost =£81.97-£81.69=£0.28. This shows a contribution of £0.28 to fixed cost. This is an
indication that the minimum selling price (above) does not generate a contribution to fixed costs. To make the
desired profit a price should be set to ensure that a contribution is made towards fixed cost. The desired
profit= Contribution- fixed cost= £0.28-£11.76= (£11.48) per unit
B) Computation of price of TDX589 that will maximise profits
Cerinta: Variable cost (£) 7.20 Market forecast of demand
Fixed cost (£) 2.20 Selling price (£) 14 13 12 11 10
=9.40 Demand (boxes) 5000 6000 7200 11.200 13.400
The company can produce 7000 boxes. They can purchase TDX589 from subcontractor £8.75 for less 5000
boxes and £8.50 for more than 5000 boxes.
Extra: Contribution for £14 selling price. Demand 5000 boxes. Unit variable cost is £7.20. Unit
contribution=selling price – variable cost= £14-£7.20=£6.80. Total contribution= Unit contribution x demand=
£6.80 x 5000boxes= £34000
Contribution for £11 selling price. Capacity can only produce 7000 boxes. The excess of 4200 boxes will be
purchased from subcontractor at a price £7.75 (since the order is under 5000). Demand is 11.200 boxes. Unit
contribution= £11-£7.20=£3.80. Contribution from 7000 boxes= £3.80 x 7000=£26.600. Contribution for the
rest of 4200 boxes: Unit variable cost=£8.75. Unit contribution= £11- £8.75= £2.25. Contrib from 4200= £2.25 x
4200 boxes= £9450. TOTAL contrib at £11 selling price= £26600+£9450=£36.050
SOLUTION Assuming that all the fixed costs are unavoidable and the released capacity has no alternative use if
the company sub-contracts the product the incremental costs of making the product are the variable costs of
1
The directors of XYplc have been analysing the performance of one of its subsidiary companies’ PD components
ltd. In an attempt to win over key customers in their industry, pd has decided to charge a price lower than its
normal price for td463 when selling to the key customers that are targeted. Details of component td463
standard costs are:
Machine group 1 Machine group 7 Machine group 29 Assembly (£)
(£) (£) (£)
Materials (per 39.00 26.00 … 4.50
unit)
Labour (per unit) 3.00 2.40 1.15 1.80
Variable 1.00 1.10 1.20 0.54
overheads (per
unit)
Fixed overheads 4.50 3.75 2.25 1.26
(per unit)
Total 47.50 33.25 4.60 8.10
Setting up costs £30.00 £18.00 £8.00 …
per batch of 200
units
a) Lowest selling price at which one batch of 200 units could be offered.
The minimum selling price should cover the incremental costs of meeting the order. It is assumed
that the labour is an incremental cost and that none of the fixed overheads would be avoidable if a
batch of 200 was not proceed.
Total cost per unit is (£) Fixed cost per unit is (£)
47.20 4.50
33.25 3.75
4.60 2.25
8.10 1.26
93.45 11.76
Therefore, the incremental cost/unit is £93.45- £11.76= £81.69
The incremental cost of a batch of 200 units is £81.69x200= £16.338 plus set up cost (£30+£18+
£8=£56) = £16.338+£56= £16.394
Extra: Checking contribution to fixed cost. If the minimum selling price for one batch of 200 units is £16.394
therefore, for 1 unit is £16.394: 200= £81.97 (min sell. price for 1 unit). Contribution to fixed costs= selling
price – variable cost =£81.97-£81.69=£0.28. This shows a contribution of £0.28 to fixed cost. This is an
indication that the minimum selling price (above) does not generate a contribution to fixed costs. To make the
desired profit a price should be set to ensure that a contribution is made towards fixed cost. The desired
profit= Contribution- fixed cost= £0.28-£11.76= (£11.48) per unit
B) Computation of price of TDX589 that will maximise profits
Cerinta: Variable cost (£) 7.20 Market forecast of demand
Fixed cost (£) 2.20 Selling price (£) 14 13 12 11 10
=9.40 Demand (boxes) 5000 6000 7200 11.200 13.400
The company can produce 7000 boxes. They can purchase TDX589 from subcontractor £8.75 for less 5000
boxes and £8.50 for more than 5000 boxes.
Extra: Contribution for £14 selling price. Demand 5000 boxes. Unit variable cost is £7.20. Unit
contribution=selling price – variable cost= £14-£7.20=£6.80. Total contribution= Unit contribution x demand=
£6.80 x 5000boxes= £34000
Contribution for £11 selling price. Capacity can only produce 7000 boxes. The excess of 4200 boxes will be
purchased from subcontractor at a price £7.75 (since the order is under 5000). Demand is 11.200 boxes. Unit
contribution= £11-£7.20=£3.80. Contribution from 7000 boxes= £3.80 x 7000=£26.600. Contribution for the
rest of 4200 boxes: Unit variable cost=£8.75. Unit contribution= £11- £8.75= £2.25. Contrib from 4200= £2.25 x
4200 boxes= £9450. TOTAL contrib at £11 selling price= £26600+£9450=£36.050
SOLUTION Assuming that all the fixed costs are unavoidable and the released capacity has no alternative use if
the company sub-contracts the product the incremental costs of making the product are the variable costs of
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