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- June 7, 2020 at 4:41 pm
Could you please help me to explain that why negotiation of cheaper rent premises may not used to close cost gap ?
I did 1 sample in Kaplan mock exam and the answer is above.
But as example 3.2 of BPP study text, project cost ( estimation cost) should be included of manufacturing cost and non manufacturing cost.
I understand that rent premises is non manufacturing cost;cheaper rent premises will reduce estimation cost and close cost gap.
Thank you.June 8, 2020 at 10:11 am
In principle it might be used to reduce the cost gap.
However I don’t have Kaplan books and only have the BPP Revision Kit, so I do not have the questions you refer to.June 8, 2020 at 2:57 pm
Here is the question in Kaplan (Section B):
Sydney Co manufactures mobile phone handsets. In its factory, three handsets (X, Y and Z) are in continuous mass production. Each of these handsets incorporates around 40 raw material and semi-finished items which are bought from outside suppliers.
Sales of X, Y have recently been declining. Sydney Co is considering a proposal to discontinue these handsets and replace them with a large range of differentiated handsets. Sales of handset Z remain healthy, and a return of 40% on the recent investment of $650,000 in the product will be required in 2018. The selling price of handset Z is set at $450 per unit for 2018, with sales expected to be 1,000 units. These new differentiated handsets (including Z) would be highly customised and would be frequently renewed to adopt the latest technologies and allow for market changes. They would be produced in short, discontinuous batches with production lines switching frequently from one product to another. In parallel, Sydney Co’s management accountant is claiming that the adoption of activity-based costing will bring benefits to the business.
The target cost for one of the new handsets, the ’Wizzle’, has been calculated to be $45, which is 10% less than the actual cost currently achievable. Sydney Co is considering providing some internal training to improve the efficiency of labour, and hence reduce the cost gap. The current material cost is $12 per unit and this will not change as efficiency changes. Labour rates are $12 per hour.
The budgeted distribution costs for next year (2018) are as follows:
Total distribution costs
It is estimated that in the next year, 325,000 orders will be processed and that the delivery vehicles will travel 1,495,000 kilometres. Customer A has indicated that 138 orders, each of which will require a journey of 122 kilometres, will be placed in the next year.
Which of the following may be used to close the cost gap on the ‘Wizzle’?
1. Sydney Co could negotiate cheaper rent for its premises.
2. Sydney Co could raise the selling price of the ‘Wizzle’.
3. Sydney Co could substitute current raw materials with cheaper versions.
4. Sydney Co could ask its employees to work overtime in order to complete work ahead of schedule.
3.Sydney Co could substitute current raw materials with cheaper versions.
Only a reduction in material costs will work toward reducing the target cost of the handset.
=> Please help me to explain why (1) is not selected ?
If the question is that “what is 2 ways to reduce target cost”, is it possibe to select (1) and (3)?
Thank you very much.June 9, 2020 at 9:56 am
This question would not ask for 2 ways.
Rent is a fixed cost and although always they would look for ways of reducing the rent expense, it is not a specific cost of the Wizzie. They make other models and the rent cost is absorbed over all of them.
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