BOTH questions are compulsory and MUST be answered
Prodcon plc manufactures and sells product Y which has a further expected life of four yearsto 30 June 20X4. In the company long-term plan the target for production/sales of product Y is10,000 units per year. Current market predictions, however, indicate that sales of product Y inthe years to 30 June 20X1, 20X2, 20X3 and 20X4 are likely to be 8,000, 7,000, 6,000 and5,000 units respectively. It is company policy to produce on a just-in-time basis with no stockholding.Strategy changes in advertising and product design should enable the sales of product Y forthe four years to 30 June 20X4 to be boosted to 10,000 units per year, thereby meeting thecompany long-term plan.The current estimates for product Y for the year to 30 June 20X1,
based on the current volume projection of 8,000 units
, are as follows:(i)
$Selling price 1,250Sub-assembly P (material cost) 250Sub-assembly Q (material cost) 120Other direct material cost 200Conversion costs 560The conversion costs are incurred on a dedicated production line that makes sub-assemblies P and Q and uses them with the other direct materials to produce productY. All unit costs are variable with output except that conversion costs contain a 75%fixed element. This fixed element is directly attributable to product Y.(ii)
Total additional costs allocated to the product
: $500,000. This is 100% fixed and contains a 30% element that isdirectly attributable to product Y, the balance being company fixed cost.
: $750,000. This contains a 40% element that varies with salesvolume. The remaining 60% is fixed. Half of this is directly attributable to product Yand the remainder is a company fixed cost.
: $100,000. This contains an 80% element that varies with salesvolume. The remainder is a company fixed cost.KAPLAN PUBLISHING Page 3 of 8