EXERCISE 10-11

Relevant costs, contribution margin, product emphasis (20–25 minutes)

Monteagudo-Playa SA is a take-away food store at a popular beach resort. Consuelo

Herreros, owner of Monteagudo-Playa, is deciding how much refrigerator space to devote to
four different drinks. Pertinent data on these four drinks are as follows:

Cola Lemonade Punch Natural

Orange
Juice
Selling price per case € 108.00 € 115.20 € 158.40 € 230.40
Variable cost per case € 81.00 € 91.20 €120.60 € 181.20
Cases sold per meter of shelf-
space per day 25 24 4 5

Consuelo has a maximum front shelf - space of 12 meter to devote to the four drinks. She
wants a minimum of 1 meter and a maximum of 6 meter of front shelf - space for each drink.

Required

1 What is the contribution margin per case of each type of drink?

2 A co-worker of Consuelo’s recommends that she maximize the shelf -s pace devoted to
those drinks with the highest contribution margin per case. Evaluate this
recommendation.
3 What shelf - space allocation for the four drinks would you recommend for Monteagudo -
Playa?

EXERCISE 10-12
Customer profitability, choosing customers (20–25 minutes)
Jours-Daim SA operates a printing press with a monthly capacity of 2000 machine - hours.
Jours- Daim has two main customers, Harpes-à-Gonds, SNC and Fourbe-Riz SA. Data on
each customer for January follow:

Harpes-à- Fourbe-Ri Total

Gonds z
Revenues € 120,000 € 80,000 € 200,000
Variable costs 42,000 48,000 90,000
Fixed costs (allocated on the basis
of revenues) 60,000 40,000 100,000
Total operating costs 102,000 88,000 190,000
Operating profit € 18,000 € (8,000) € 10,000
Machine-hours required 1500 hours 500 hours 2000 hours

Each of the following requirements refers only to the preceding data; there is no connection
between the requirements.
Required

1. Should Jours-Daim drop the Fourbe-Riz business? If Jours-Daim drops the Fourbe-Riz
business, its total fixed costs will decrease by 20%.
2. Fourbe-Riz indicates that it wants Jours-Daim to do an additional €80 000 worth of
printing jobs during February. These jobs are identical to the existing business
Jours-Daim did for Fourbe-Riz in January in terms of variable costs and machine-hours
required. Jours-Daim anticipates that the business from Harpes-à-Gonds in February
would be the same as that in January. Jours-Daim can choose to accept as much of the
Harpes-à-Gonds and Fourbe-Riz business for February as it wants. Assume that total
fixed costs for February will be the same as the fixed costs in January. What should
Jours­Daim do? What will Jours­Daim’s operating profit be in February?

EXERCISE 10-17

Relevant costing (From ACCA Financial Information for Management, Part 1, June 2004)
(40 minutes)
Ennerdale Ltd has been asked to quote a price for a one­off contract. The company’s manage­
ment accountant has asked for your advice on the relevant costs for the contract. The
following information is available:

Materials
The contract requires 3000 kg of material K, which is a material used regularly by the
company in other production. The company has 2000 kg of material K currently in stock
which had been purchased last month for a total cost of £19 600. Since then the price per
kilogram for material K has increased by 5%. The contract also requires 200 kg of material L.
There are 250 kg of material L in stock which are not required for normal production. This
material originally cost a total of £3125. If not used on this contract, the stock of material L
would be sold for £11 per kg.

Labor
The contract requires 800 hours of skilled labor. Skilled labor is paid £9.50 per hour. There is
a shortage of skilled labor and all the available skilled labor is fully employed in the company
in the manufacture of product P. The following information relates to product P:

£ per
unit
Selling price 100
Less:
Skilled labor 38
Other variable cost 22
60
40
Reguired:
1. Prepare calculations showing the total relevant costs for making a decision about the
contract in respect of the following cost elements:
- Materials K and L; and
- Skilled labor.
2. Explain how you would decide which overhead costs would be relevant in the financial
appraisal of the contract.

EXERCISE 10-18
Special-order decision (35–40 minutes)

Fri-Flask specializes in the manufacture of one - liter plastic bottles. The plastic molding
machines are capable of producing 100 bottles per hour. The firm estimates that the variable
cost of producing a plastic bottle is € 25. The bottles are sold for € 55 each.
Management has been approached by a local toy company that would like the firm to produce
a molded plastic toy for them. The toy company is willing to pay € 3.00 per unit for the toy.
The unit variable cost to manufacture the toy will be € 2.40. In addition, Fri-Flask would
have to incur a cost of € 20,000 to construct the mold required exclusively for this order.
Because the toy uses more plastic and is of a more intricate shape than a bottle, a molding
machine can produce only 40 units per hour. The customer wants 100,000 units. Assume that
Fri-Flask has a total capacity of 10,000 machine - hours available during the period in which
the toy company wants delivery of the toys. The firm’s fixed costs, excluding the costs to
construct the toy mold, during the same period will be € 200,000.

Required

1. Suppose the demand for its bottles is 750,000 units, and the special toy order has to be
either taken in full or rejected totally. Should Fri-Flask accept the special toy? Explain
your answer.
2. Suppose the demand for its bottles is 850,000 units, and the special toy order has to be
either taken in full or rejected totally. Should Fri-Flask accept the special toy order?
Explain your answer.