Kaplan revisoin kit Q.28. electronic control system

I am away from home until Wednesday and so do not have access to the Kaplan kit. I will reply on Wednesday when I am home.

If RP buys from RS, then we are not concerned about charges between group companies – what we are after is the variable costs that will need to be paid externally.

The only exception to this is that because RR is busy with work outside the group, if they produce anything for RP then they will lose outside sales – they have charged current market prices and so this is the amount they will lose.

So….

the relevant costs are as follows:

RR – lost sales revenue externally: $8,000 + $11,000 = $19,000

RS – we want the external variable costs. Their total costs are 42,000 but this includes but this includes costs from group companies of 8,000 (to RR) and 30,000 (to RT), so the external costs are 42,000 – 38,000 = 4,000
However we only want the variable (marginal) costs and for RS 70% of their costs are variable, so 70% x 4000 = $2,800

RT – again, we want the external variable costs. We are not told their total costs, but we do know that the are selling to RR at 30,000. We also know that they make a 20% profit margin on cost. So their total cost must be 30,000 x 100/120 = 25,000. (They are adding profit of 20% of cost to get to 30,000).
So, their total cost is 25,000 but this includes the cost of parts bought from group company RR for 11,000. So the external cost is 14,000. The variable cost is 65% of this, which is 65% x 14,000 = $9,100.

So…..after all that, the total relevant cost is

$19,000 (RR) + $2,800 (RS) + $9,100 (RT) = $30,900.

(This was not an exam question and I think it is a bit over-complicated for the exam, but it is still good practice).

You are very welcome 🙂