Accounting Business Reporting for Decision Making

450 Accounting: Business Reporting for Decision Making

Required

a. Calculate the available production capacity.

b. Calculate the contribution margin per unit for both the current production of compasses and

the special order compasses.

c. Should the special order be accepted? Show calculations.

d. What is the opportunity cost if Neverlost required 10 000 compasses?

e. Would you recommend the special order if Neverlost Company required 10 000 compasses?

10.29  LO2, 6

Nicholas Cash of Advantage Tennis Coaching (ATC) has received an offer from a top-ranked

Australian player, Roger Novac, who wishes to spend two months in the beautiful Queensland

weather and have 50 private coaching sessions with Nicholas. If the offer is accepted, Nicholas

will need to hire an additional tennis court for a cost of $14 000 for two months. The following

data are provided.

Coaching session fee

Tennis balls per session for Nicholas

Tennis balls

$ 600

180

70

Required

a. Calculate the number of tennis coaching sessions required for Nicholas to break even.

b. Draw a graph to show the cost–volume–profit relationships for this special contract for

ATC.

c. If Nicholas provides 50 coaching sessions for Roger, what is the amount of profit ATC would

achieve?

d. To ensure Roger is happy with the coaching services provided, Nicholas has arranged for

a number of aspiring senior players to attend sessions for match play. ATC will pay match

players $80 per session. ATC wishes to maintain the same amount of profit with the match

players as calculated in (c) above. To achieve this, Nicholas will approach the manager

of Tennis Pro Shop and ask for the balls to be provided at no cost. Negotiations will then

be required between the Tennyson Tennis Centre manager and Nicholas regarding the fee

for the  hire of the tennis court. What is the upper limit that Nicholas will be prepared to

pay for the hire of the court to maintain the amount of profit calculated in (c) above from

50 sessions.

e. What qualitative factors should Nicholas also consider?

10.30  LO2, 6

Pamcar Industries sells IT equipment, specialising in printers and faxes. The following statement

reflects the contribution margin of each activity, and overall profit levels.

Printers Faxes Total

Sales

Less: Variable costs

$3 096 000

2 260 000

$1 595 000

1 065 000

$4 691 000

3 325 000

Contribution margin

Direct fixed costs

Common fixed costs:

Utilities

Other administration

836 000

415 000

530 000

355 000

1 366 000

770 000

40 000

162 000

Profit $ 394 000

Required

a. Calculate the contribution margin ratios for each of the two areas of activity, and in total.

b. Using the total contribution margin ratio, calculate the level of sales required of each product

to break even.