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2012 june robber question
The current total annual costs of producing the keypads and the display screens are:
Keypads Display screens
Production 80,000 units 80,000 units
$’000 $’000
Direct materials 160 116
Direct labour 40 60
Heat and power costs 64 88
Machine costs 26 30
Depreciation and insurance costs 84 96
Total annual production costs 374 3904. Machine costs are semi-variable; the variable element relates to set up costs, which are based upon the number
of batches made. The keypads’ machine has fixed costs of $4,000 per annum and the display screens’ machine
has fixed costs of $6,000 per annum. Whilst both components are currently made in batches of 500, this would
need to change, with immediate effect, to batches of 400.Q1–number of batch increase it means that variable cost will increase but 80,000/500=160 unit per batch and change to 80,000/400=200 unit per batch and calculation is (30000-6000)/160=$150 per unit and $150*200=$30,000 . cost is same $30,000
Q2–27,500 and 30,000 cost also include fixed cost and i don’t know why add extra fixed cost ex 4000 or 6000 if machine fixed cost is relevant
Q3–if machine fixed cost is irrelvant i don’t know why also add fixed cost
Q1 The variable element relates to the number of batches, and not to the number of units. (This is more of an ABC part of the question).
Q2. The fixed cost is not irrelevant because the question is asking about whether to continue production or to outsource production. If they outsource then they will not have the fixed cost.
Q3. See what I have written for Q2
sir i don’t understand semi variable based on batch. y axis is $ and x axis is batch.and if number of batch is decreasing the cost should be increasing beacuse it requir more unit to produce.so the graph is decreasing . when x=0 y=4.000 but when x=500 y=26.000 it does’t make sense
The question says specifically that the variable cost is the cost of set-ups and is based on the number of set-ups. It is irrelevant how many units there are in each batch. If there are more set-ups then there will be more total cost, if there are fewer set-ups there will be less total cost.
For example, if the cost for each set-up was $100, then 5 set-ups would cost $500 whereas having 4 set-ups would cost $400. How many units there are in each batch does not affect the cost of setting things up each time a batch is produced.
Again, this part is really the same as ABC. Have you watched the free lectures on activity based costing?
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