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Hi Mr John,
I went through a question from BPP exam kit which I don t fully agree with the answer provided. I would appreciate if you could provide your opinion.
I will provide only a part of the question.
Total annual cost to produce the keypads and the display screen are
keypad Display screen
Direct material 160 116
Direct labour 40 60
Heat and power costs 64 88
Machine costs 26 30
Depreciation cost 84 96Machine 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 $ 4000 per annum and the display screens machine has fixed cost of $6000 per annum. Whilst both components are currently made in batches of 500 this would need to change with immediate effect to batches of 400
Answer provided
Fixed machine cost 4000 and 6000 as treated as specific fixed cost and are therefore included in the relevant cost.
Concerning the variable element relating the set up costs, they have not been included as they are the costs arise if production take place.Shouldn’t the cost of set up machine being included? I think the cost of making the product should be included as relevant cost
How can we decide that fixed cost are specific for producing the keypad and the display? Would it have been incorrect if I had excluded from my calculation?
Thanks and Regards
Gabbi
When it is a past exam question, there is no need for you to type it out – just write the name and which exam it was in (June 2012) 🙂
With regard to the specific fixed costs, if you read the examiners comments (which BPP has printed above the answer) then the examiner did say that it was acceptable to have excluded the fixed costs (which was because the wording of the question had not really made it clear).
The variable set-up costs have been included (27500 and 30000) but remember that they vary with the number of set-ups, which is the number of units divided by the units per batch.
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Demeter Ltd owns a machine of type DK which could be used in production for two more years at most. The machine originally cost GH¢45,000 five years ago. Its realisable value is currently GH¢8,000 (because a special opportunity for sale had arisen), but it would be zero at all subsequent times. If the machine were to be used for two more years, it would require a major overhaul at a cost of GH¢9,000 at the end of one year.
A new model of the machine is now being marketed. It costs GH¢40,000 and has a maximum life of ten years, provided that special maintenance is undertaken at a cost of GH¢20,000 after eight years. The new model would have no realisable at any time. Assume that no other new models are expected to become available in the foreseeable future, and that no changes are expected in costs or demand for output of the machine.
Demeter’s cost of capital is 15% per annum.
Required:
Prepare calculations to show whether Demeter’s existing machine should be replaced now, or after one or two years.Why have you typed this question on a thread headed up ‘Make or Buy’? This is not a make or buy question and therefore you should in future start a new thread when you ask about a different topic.
However there is no point in simply setting me a test question and expecting me to produce an answer.
Firstly, this is replacement which is not examinable in Paper F5. It can only be examined in Paper F9.
Secondly, you must have an answer in the same book in which you found the question. Ask about whatever it is in the answer that you are not clear about, and then I will help you.
(If you do not have an answer because it was set as a test question, then we certainly don’t provide answers!!)If you are in fact taking Paper F9 (not F5), then everything needed to be able to answer this question is explained (with examples) in my free lectures on replacement, and you cannot expect me to type out all my lectures here 🙂
The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
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