Relevant costing — OpenTuition Forums

Sshameela3y ago

Gloop is considering the further processing of its face foundation cream by adding an anti aging compound . Exisitng sales are 25000 tubs of cream but this expected to increase by 25% if the anti aging compound is added. The anti aging compound will cost $2.50 per tub and a royalty will be payable on sales revenue of 1.5% to the patent holder. Gloop also thinks that the selling'price of the cream will increase from $15 to $20 per tub. Other material costs will be unaffected at $6 per tub. Gloop operates a total absorption costing system and allocates fixed costs to products at the rate of $2 per $1 of sales revenue How much better off financially will Gloop be if it decides to proceed with this idea? $ _____________ improvement i got the calculation correct for Royalty and sales revenue.. But i didn't understand the remaining calculations given in the kit.

IAW3005Tutor3y ago#1

I cannot locate this question. Where is it from?

Sshameela3y ago#2

Well, i have already typed the whole question. It's in kaplan kit - Old edition (Until June 2017).

IAW3005Tutor3y ago#3

Why are you using such an old exam kit? I think it's Incremental revenue = 25% x 25,000 x ($20 - $15) = $31,250 Incremental cost = $2.50 x 25,000 + 1.5% x $31,250 + $2 x $31,250 = $10,312.50 Therefore, the financial improvement will be: $31,250 - $10,312.50 = $20,937.50 So, Gloop will be better off financially by $20,937.50 if it decides to proceed with the idea of adding the anti-aging compound to its face foundation cream.

Sshameela3y ago#4

The answer is incorrect. It's $125000.

IAW3005Tutor3y ago#5

I will say the same point - your exam kit is old and you are doing out of date PM questions. I think it’s actually Incremental revenue: - Existing sales: 25,000 tubs x $15 per tub = $375,000 - Expected increase in sales: 25% x 25,000 tubs = 6,250 tubs - New sales: 25,000 tubs + 6,250 tubs = 31,250 tubs - New selling price: $20 per tub - Incremental revenue: 6,250 tubs x $20 per tub = $125,000 Incremental costs: - Cost of anti-aging compound: $2.50 per tub x 31,250 tubs = $78,125 - Royalty payable: 1.5% x $20 per tub x 31,250 tubs = $9,375 - Incremental variable cost: $6 per tub x 31,250 tubs = $187,500 - Incremental fixed cost: $2 per $1 of sales revenue x $125,000 incremental revenue = $250,000 Total incremental costs: $78,125 + $9,375 + $187,500 + $250,000 = $525,000 Financial improvement: Incremental revenue - Incremental costs = $125,000 - $525,000 = -$400,000 Therefore, Gloop will be worse off financially by $400,000 if it decides to proceed with the further processing idea.