Senior Secondary (HKDSE) · Business, Accounting and Financial Studies
2 multiple-choice questions marked as you go, and 4 written questions with worked solutions. All on Cost Accounting for Decision-making .
ABC Co. manufactures two products, Product X and Product Y. Both products require a special raw material, which is in short supply, limited to $$1,000$$ kg per month. Additional information:
| Item | Product X | Product Y |
|---|---|---|
| Selling Price per unit | $$HK\$200$$ | $$HK\$150$$ |
| Variable Cost per unit | $$HK\$120$$ | $$HK\$90$$ |
| Raw Material required per unit | $$2$$ kg | $$1$$ kg |
To maximise profit, which product should ABC Co. prioritise for production given the limited raw material?
A manufacturer currently makes Component X internally. The annual costs for producing $$10,000$$ units are: Direct materials $$HK\$40,000$$, Direct labour $$HK\$60,000$$, Variable overheads $$HK\$20,000$$, and Fixed overheads $$HK\$30,000$$. $$HK\$15,000$$ of the fixed overheads are avoidable if Component X is purchased externally. An external supplier offers to sell Component X for $$HK\$13$$ per unit. If the company buys Component X, the freed capacity could be used to produce another product, Component Y, generating an additional contribution margin of $$HK\$25,000$$ per year. Should the company make or buy Component X?
A manufacturing company achieved actual sales of \(HK\$800,000\) for the year. Its breakeven sales volume for the same period was \(HK\$600,000\). Calculate the company's margin of safety in percentage.
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Mega Retail Group is evaluating the profitability of its Department Y. For the past year, Department Y reported revenues of \(HK\$500,000\), variable costs of \(HK\$300,000\), and direct fixed costs of \(HK\$150,000\). Additionally, \(HK\$100,000\) of common fixed costs were allocated to Department Y, which would continue to be incurred by the company even if Department Y were eliminated.
All of Department Y's direct fixed costs are avoidable if the department is closed. If Department Y is eliminated, the space it occupies could be used to expand Department Z, which is projected to generate an additional \(HK\$80,000\) in contribution margin annually.
Should Mega Retail Group eliminate or retain Department Y? Provide a detailed justification for your decision with calculations.
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When a company accepts a special order that fully utilizes its production capacity, what type of cost is incurred by sacrificing revenue from normal sales, and why is it relevant to the special order decision?
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Apex Manufacturing Ltd. produces Product Z. The company's normal selling price is $$HK\$120$$ per unit. Currently, Apex produces and sells $$8,000$$ units per month, operating well below its maximum capacity of $$10,000$$ units per month.
The cost structure per unit is as follows:
Total fixed manufacturing overhead amounts to $$HK\$160,000$$ per month, irrespective of the production level within the relevant range.
Apex Manufacturing Ltd. has received a special order from a new customer to purchase $$1,500$$ units of Product Z at a price of $$HK\$90$$ per unit. This special order would not affect the company's regular sales, and no additional fixed costs would be incurred. However, a special label is required for this order, costing $$HK\$2$$ per unit.
Required:
(a) Calculate the incremental revenue from accepting the special order.
(b) Calculate the total incremental costs associated with accepting the special order.
(c) Based on your calculations, should Apex Manufacturing Ltd. accept this special order? Justify your answer.
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