388 ACCOUNTING FOR MANAGERS
žactual cost per unit;
žmarginal cost per unit.
8.3 Corporate Document Service incurs variable costs of £7 every time a docu-
ment is processed. The business providing the service has fixed costs of £100,000
per month. The selling price for each service is £25.
žBy how much does the average cost change between processing 10,000 and
20,000 documents?
žDoes the marginal cost change in the same way?
žExplain why the average cost changes.
8.4 The Cook Co. has two divisions, Eastern and Western. The divisions have
the following revenue and expenses:
Eastern Western
££
Sales 550,000 500,000
Variable costs 275,000 200,000
Divisional fixed costs 180,000 150,000
Allocated corporate costs 170,000 135,000The management of Cook is considering the closure of the Eastern division sales
office. If the Eastern division were closed, the fixed costs associated with this
division could be avoided but allocated corporate costs would continue.
Given this data:
žCalculate the effect on Cook Co.’s operating profit before and after the closure.
žShould the Eastern division be closed?
8.5 Jacobean Creek PLC has provided the following data for last year:
Sales 5,000 units
Sales price £80 per unit
Variable cost £55 per unit
Fixed cost £25,000For the current year, Jacobean Creek believes that although sales volume will
remain constant, the contribution margin per unit can be increased by 20% and
total fixed cost can be reduced by 10%.
žCalculate the operating profit for last year and the current year.
žWhat is the increase in profit between the two years?
8.6 Relay Co. makes batons. It can make 300,000 batons a year at a variable cost
of £750,000 and a fixed cost of £450,000. Relay predicts that next year it will sell
240,000 batons at the normal price of £5 per baton. In addition, a special order has
been placed for 60,000 batons to be sold at a 40% discount. What will be Relay