CARDIO CO (DECEMBER 2015)

Cardio Co manufactures four types of fitness equipment: elliptical trainers (E), treadmills
(T), cross trainers (C) and rowing machines (R). Cardio Co is considering ceasing to
produce elliptical trainers at the end of 2015.
The budgeted sales prices and volumes for the next year (2016) are as follows:
T C R
Selling price $1,600 $1,800 $1,400
Units 420 400 380
Total sales revenue $672,000 $720,000 $532,000 $1,924,000

The standard cost card for each product is shown below.

Labour costs are 60% fixed and 40% variable. General fixed overheads excluding any
fixed labour costs are expected to be $55,000 for the next year.

The following multi‐product breakeven chart for Cardio Co has correctly been drawn:
Cardio Co has recently received a request from a customer, Heart Co, to provide a one‐
off order of fitness machines (T, C and R), in excess of normal budgeted production for
2016. The order would need to be completed within two weeks.

(1) Which of the following are valid factors to consider in the decision to cease
the production of elliptical trainers at the end of 2015?
(1) The elliptical trainers made a loss in 2015.
(2) The elliptical trainers made a positive contribution in the year just passed.
(3) The elliptical trainer market outlook in the long term looks very poor.
(4) Cardio Co also sells treadmills and many elliptical trainers buyers will also buy
treadmills.
(5) The business was founded to produce and sell elliptical trainers.
A Only (3) and (4) B (1), (3), (4), (5)
C (2), (3), and (4) D None of the above

(2) Which of the following statements about relevant costing are true?
(1) Fixed costs are always general in nature and therefore never relevant.
(2) Notional costs are always relevant, as they make the estimate more realistic.
(3) An opportunity cost represents the cost of the best alternative foregone.
(4) Avoidable costs would be saved if an activity did not happen, and therefore are
relevant.
A (2) and (4) B (3) and (4)
C (2), (3), and (4) D (1), (2) and (4)

(3) What is the margin of safety in $ revenue for Cardio Co in 2016?

A $1,172,060 B $1,577,053 C $1,924,000 D $1,993,632

(4) What would happen to the breakeven point if the products were sold in order
of the most profitable products first?
A The breakeven point would be reached earlier.
B The breakeven point would be reached later.
C The breakeven point would be reached at the same time as in the graph above.
D The breakeven point would never be reached.

(5) Which statement correctly describes the treatment of general fixed overheads
when preparing the Heart Co quotation?
A The overheads should be excluded because they are a sunk cost.
B The overheads should be excluded because they are not incremental costs.
C The overheads should be included because they relate to production costs.
D The overheads should be included because all expenses should be recovered.