2.2. Traditional costing methods
A subsection of Accounting, 9706, through 2. Cost and management accounting (AS Level)
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Garth Vader is a wholesaler who sells specialist cabinets. His fixed costs are $8 million. He buys in cabinet 1 for $400 and sells it for $500. As an alternative he is considering manufacturing the cabinets and has studied two methods of production. The manufacture of cabinet 2 relies more on labour whilst cabinet 3 relies more on machinery. The costs would be as follows: Cabinet 2 Cabinet 3 Variable costs per cabinet $240 $220 Additional fixed costs per production line $36 million $79.2 million Proposed selling price per cabinet $480 $520 The additional fixed costs for cabinet 3 are higher as more expensive machinery has to be leased and additional factory rent will be paid. It is assumed, whichever option is chosen, that all production will be sold. Only one type of cabinet will be sold. REQUIRED Calculate for cabinet 2 the number to be sold so that the total annual costs equal the total purchase costs for cabinet 1. Calculate for cabinet 3 the number to be sold so that the total annual costs equal the total purchase costs for cabinet 1. Calculate the production levels in units at which the net profit for cabinet 2 would equal the net profit for cabinet 3. Calculate the profit or loss attainable for each of the three options at annual sales levels of: 200 000 units Cabinet 1 Cabinet 2 Cabinet 3 250 000 units Cabinet 1 Cabinet 2 Cabinet 3 300 000 units Cabinet 1 Cabinet 2 Cabinet 3 Calculate the minimum production level in units at which it would pay Garth Vader to manufacture the cabinets instead of buying in cabinet 1. State four assumptions made when using break-even analysis.
9706_s10_qp_23
THEORY
2010
Paper 2, Variant 3
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