abc ltd manufactures a wide range of components for use in various industries 448207

1. ABC Ltd. manufactures a wide range of components for use in various industries. It has developed a new component called the UNITX. It is practice of ABC Ltd. to set a “list” selling price for its components and charge this price to all customers. It sells its components directly to customers all over the Malaysia and abroad.

ABC Ltd has surplus capacity available to enable it to produce up to 350,000 units per year without any need to acquire new facilities or cut back on the production of other products.

Market research indicates that the demand for units per year will move as follows in response to changes in selling prices.

1. At selling price of $9.00 per unit, no unit will be sold.
2. For every $0.03 the selling price is reduced below that figure sales will increase by 1000 units until total sales reach 100,000 units.
3. From the point, the selling price must be reduced by $0.04 for each additional 1000 units increase in sales.

Research into production costs indicates that the marginal costs for unit production in any given year are as follows.

1. Labour: initially $2.00 per unit but falling by $0.025 per unit for each extra 1,000 units produced, thus the first 1,000 units produced incurs a labour costs of $2,000, the second 1,000 units the labour cost of $1,975, and the third 1,000 units incurs a labour cost of $1,950 and so until output reaches 80,000; output can be increased beyond 80,000 units per year without incurring any additional labour costs.
2. Materials: $0.50 per unit constant at all levels of output.
3. Overhead: Initially $1.00 per unit and remaining constant until output reaches 100,000 units per year; the overhead cost per unit of producing at above that level rises by $0.25 for each extra 1,000 units produced, thus the 101^st thousand units produced incurs an overhead cost of $1,002.50, the 102^nd thousand units produced incurs an overhead cost of $1,005 and so on.

REQUIRED:

Calculate (accurate to the nearest cents) the selling price per unit that will maximise ABC Ltd’s profit from unit production.

(10 marks)

1. “There are various problems arising from setting a single price for your product and charging all customers the same. For one thing, you for go revenue from customers who would be prepared to pay a higher price. For another thing you turn away customers who would be prepared only to pay a lower a price but one which exceeds variable production costs.”

REQUIRED:

Discuss this statement with reference to ABC Ltd. and its sale of units.

(10 marks)

QUESTION 2

Sapura Plc makes a product using two material, A and B, in the production process. A system of standard costing and variance analysis is in operation. The standard material requirement per kg of mixed output is 60% material A at $30 per kg and 40% material B at $45 per kg with a standard yield of 90%.

The following information has been gathered for the three months January to March:

The actual price per kg of material B throughout the January to March period was $45.

REQUIRED:

1. Prepare material variances for each of January, February and March period which include yield and mix variance in total usage and price variances for each material and in total.

(50 marks)

1. Prepare comments for management on each variance including variance trend.

(15 marks)

1. Discuss the relevance of the variance calculated above in the light of the following additional information.

The company has an agreement to purchase 360kg of material B each month and the perishable nature of the material means that it must be used in the month of purchase and additional supplies in excess of 360 tonnes per month are not available.

(15 marks)

(Total: 100 marks)

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