Problem: Busy Pig company produces two products. Absorption costing for the products look like this:
Product A Product B
Direct materials 6000 40 000
Direct wages 10 000 20 000
Indirect variable costs in manufacturing(40%) 4000 8000
Indirect fixed costs in manufacturing (60%) 6000 12 000
Total manufacturing cost 26 000 80 000
Indirect variable costs in sales/administra(10%) 2600 8000
Indirect fixed costs in the sale/administra(30%) 7800 24 000
Absorption cost 36 400 112 000
Basically, expect the company to normal to produce and sell 1 000 units of product A and 200 units of the product B during a given period. Absorption costing are based on these production volumes. Selling price per unit is set to kr 40 000 for A and kr 120 000 for B. It be consumed 60 kg materials per unit A and 400 kg material per unit B. Working hours consumption per unit A is 40 hours, while it is 80 hours per unit B.
On the basis of this information to answer the questions below.You should ignore VAT.
1) What is the basis for the calculation of the additional rates for indirect costs in manufacturing?
2) What is the basis for the calculation of the additional rates for indirect costs of sales and administration department?
3) Calculate coverage for each of the two products.
4) Suppose that the material is a bottleneck. What priority between A and B are the most profitable for the company?
5) Suppose instead that labor is the bottleneck. What priority between A and B are now the most profitable for the company?
6) What is break even sales/break even turnover?
7) How much revenue must be that the profit for the period will be kr 12 000 000?
8) What must the purchase price for product B that gross margin ratio for the product will be 40%?
9) Assume that the company may receive a special order (even orders) of 50 units of the product B at a price of NOK 88 000 per unit. will the order be profitable?
10) Busy Pig considering implementing a sales campaign for product A. For a given period, the company will give discounts to reduce the purchase price by 10% on the product. In addition, the company will increase advertising efforts. This will cost the company kr 300 000. Without this campaign believed the sale of A for the period to be 1 000 units. The sale of B is not expected to be affected. How much was the number of units sold by A percentage increase for the sales campaign will be profitable?