Accounting for Managers: Interpreting accounting information for decision-making

SOLUTIONS TO QUESTIONS 417

Solutions for Chapter 9

9.1
Variable costs are £2 per unit (£10,000/5,000), for December 10,000 @ £2=£20,000.
Fixed costs do not change with activity, for December £30,000.
As total costs are £75,000, semi-variable costs for December are £25,000 (£75, 000 −
£20, 000 −£30,000).

9.2
Product R Product S
Selling price 12 20
Direct materials 4 11
Throughput contribution 8 9
Machine hours 4 3
Return per machine hour £2 £3
Ranking 2 1

Product S generates more throughput contribution per machine hour (the limiting factor).
Labour hours are irrelevant.

9.3
Hours Cost £
15,000 345,000
7,000 185,000

Increase 8,000 160,000

The increase in hours sold of 8,000 has generated a higher cost of £160,000. This cost must
be a variable cost as, by definition, fixed costs do not vary with the volume of activity.
Therefore variable costs are £160,000/8,000 or £20 per hour.
At the 15,000 level of activity, 15,000 @ £20=£300,000. Therefore fixed costs are £45, 000
(£345, 000 −£300,000).
At the 7,000 level of activity, 7,000 @ £20=£140,000. Therefore fixed costs are £45, 000
(£185, 000 −£140,000).
However, this only applies in the relevant range, as outside the relevant range the cost
structure of fixed and variable costs may alter.

9.4
Direct materials 40 @ 2.50 100
Direct labour 7 @ £12 84
4 @ £7 28 112

11 212

Variable overhead 11 @ £5= 55

Variable production cost 267

Fixed production overhead

£1,000,000/12,500 80

Total production cost 347