Accounting 9706 · AS & A Level · Costs and cost behaviour

Costs and cost behaviour — practice question

EMM is a manufacturing business that makes one product, a desk made of wood. It has a contract to provide 220 desks a week to H Co, a large retailer, at a selling price of $44 per unit. The costs faced by EMM are direct material costing $36.00 per unit; production labour salaries of $410.00 per week plus a bonus of $0.50 per unit; finishing labour salaries of $180.00 per week plus a bonus of $0.30 per unit; machine hire costing $120.00 per week; administration costs of $400.00 per week; and rent and rates of $240.00 per week.
(a)[3]

Calculate the weekly break-even point in units.

(b(i))[1]

Define the term 'margin of safety'.

(b(ii))[2]

Explain how useful the margin of safety is for a business.

(c)[3]

Prepare a weekly profit statement based on marginal cost principles.

(d)[3]

Calculate the selling price per unit that EMM should quote to K Limited in order to achieve a 20% contribution to sales ratio.

(e)[5]

Prepare a profit statement for EMM showing the total weekly contribution and total weekly profit if K Limited accepts the quotation.

(f)[1]

Calculate the total weekly profit of EMM if EMM agrees to give the settlement discount.

(g)[7]

Advise EMM whether the terms proposed by K Limited ought to be accepted or rejected. Support your answer with financial as well as non-financial factors.

(h)[2]

State two advantages that cost-volume-profit analysis offers management.

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