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Part a states that the amount which will be saved in fixed cost amounts to $5000, while the total fixed cost incurred is $18000.
Aren’t we supposed to subtract 5000 from (15000+18000), instead of using only the contribution cost?
Example 2 from same chapter note 5 answer is not clear to me. Could you explain why we calculated the full hours which 6000 while the capacity hours are only 4000 and than added another 2000 after calculating the full amount. Hope its clear.
Many thanks
Although there is more than one way you can do your workings (all giving the same final answer) the answer (at the back of the notes) does not only use the contribution.
If the stop making Rooks, we will lose the whole contribution of 15,000.
We will also save fixed costs, but only fixed costs of $5000.
(The company will stay be having to pay the remainder of the fixed costs, whether or not we make Rooks).So, we will lose a net 10,000 (15,000 – 5,000) if we stop making Rooks, so we will be better to continue making Rooks.
With regard to example 2, have you watched the free lecture on this?
We need 6,000 hours of machine time and machine time costs $3 per hour (which will only be paid while the machine is working).
So whatever happens, working 6,000 hours will cost us $3 per hour for the variable costs.
For 2,000 of those hours, we will be having to stop making another job, so this will lose us an addition $2 per hour for those 2,000 hours.
Hello John Moffat,
Please how did you come about the decision to make or buy products x,y,z in example in the chapter covering short term decision making. I understand the ranking, but how do you get the savings per kg as well as the units to make or buy?
Thanks in anticipation of your response.
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