Accounting for Managers: Interpreting accounting information for decision-making

418 ACCOUNTING FOR MANAGERS

9.5
Production will be 8,000 units special order plus 12,000 units regular sales to give a
maximum production capacity of 20,000 units.
Variable costs are £49 per unit (£588,000/12,000 units).
Fixed costs are £345,000 (£245, 000 +£100,000).

Sales 12,000 units at £100 £1, 200 , 000

Sales 8,000 @ £95 760,000

Total £1, 960 , 000

Variable costs 20,000 @ £49 980,000

Contribution margin 980,000

Fixed costs 345,000

Operating profit £635, 000

9.6
As the material is in regular use and has to be replaced, it is irrelevant that some is already
in stock as the relevant cost – the future, incremental cash flow (in this case the replacement
cost) – is 150 kg @ £12.50, a total of £1,875. The scrap value is not relevant.

9.7
Macro Mezzo Micro
Contribution per unit £6 £9 £14
Machine hours 2 2 2
Contribution per hour £3 £4.50 £7
Ranking 3 2 1

Therefore the ranking should be to maximize production of Micro, followed by Mezzo, and
finally Macro.

9.8
Target price £29.00
Less 25% 7.25

Target cost 21.75

Production cost 22.50

Reduction per unit 0.75

9.9
See Table A2.8.