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Cardio Co manufacture 4 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. Which of the following are valid factors to consider in decision?
1) Elliptical trainers made a loss in 2015
2) Elliptical trainers made a positive contribution in the year just passed
3) Elliptical trainer market outlook in the longterm looks very poor
4) Cardio Co also sells treadmills and many Elliptical trainers buyers will also buy treadmill
5) The business was founded to produce and sell Elliptical trainersSir the correct answers are 3 and 4, but I could not understand. Can you please explain?
1 and 2 on their own are not directly relevant because the affect of ceasing production depends on how the fixed overheads are affected.
3 Is relevant because if they are not going to be able to sell Elliptical then there is obviously going to be no point in producing
4 is relevant because even if elliptical do turn out on their own to not be worth producing, they might be worth producing if the fact that people buying them also buy treadmills and maybe the profit on those treadmills is more than what they might be losing on ellipticals.
5 is not relevant at all. It is like saying that a company that was founded to make film cameras should always make film cameras. That would be silly because nobody buys film cameras any more – so they should stop and make digital cameras instead.
John, in the following sub-question 5:
Which statement correctly describes the treatment of general fixed overheads when preparing the Heart Co quotation?
Answer is: The overheads should be excluded because they are not incremental costs.I don’t understand why these costs are excluded when for the calculation of margin of safety (sub-question 3) these were included.
If this is a past exam question then please tell me which exam it is in.
I am really sorry, but I have the original exam question in front of me and there is no sub-question 5 and no mention of Heart.
I can only assume that you are looking at the question in a Revision Kit and thatchy have adapted the question.
If it is in the BPP Revision Kit, then although I do have it at home I am on vacation at the moment and do not have the Revision Kit with me (and because of the virus I do not know when I will be able to get home 🙁 )
No problem, hope you are keeping safe. Respond when you can, here is the question. As I am unable to insert tables here, I have uploaded the table as a picture to a file hosting website (wetransfer) – link included below.
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) can be found in the link 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.
Question 3: What is the margin of safety in $ revenue for Cardio Co in 2015?
Answer: $ 1,577,053Question 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.Answer for question 5 is down as B. I would have thought overheads would be included because we included these for question 3 to calculate breakeven sales revenue which goes into margin of safety calculation.
Additional information given in the question:
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.
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