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Okidoke hey, I’m Russ and I am going insane.
So, theres a company which is working at 130% capacity. Working above 100% incurs all sorts of costs variable and fixed in nature (heating, lighting etc). As such working at 130% involves additional costs such as salary at time and a third etc. I get this, I understand this, I even did an excel sheet which works out the cost of capacity at any level.
Now the problem is the question also includes this:
Said company is looking to outsource to a company for an additional 20% of capacity, calculate the cost of the additional work for the external company on total absorption costing principles and marginal costing principles.I just, I just dont even know where to start? I mean the textbook talks about absorption costing and marginal costing but nothing about what to do in cases of outsourcing?? I should also note that the number of units, price of units, labour hours are not given, the only sales figure is the profit from the previous year.
Okay perhaps a simpler question to get the ball rolling, I think I’ve worked out the sorting of figures into categories.
I have Total production costs (direct materials, direct labour, variable production costs and fixed production costs) of 83,000. The direct materials are 20,000, labour 50,000, variable overheads 13,000 and fixed overheads 19000.
How would i work out the additional costs of working at an additional 10% of capacity (if I’m currently working at 140%) by using marginal and absorption costing?
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