PEV June 2005 - Task 2.2

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
Hi All

Some help would be greatly appreciated. I am trying to do the report for the directors on whether to go ahead with subcontracting of Model H and am getting into a mess with the calculations.

At the beginning of the report the contribution is stated as the contribution/850 units (£122.35)and the variable costs are also based on 850 units when 1000 units were made. Why is it based on 850 units and not 1000?

Thanks in advance
Eva :?

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:PEV June 2005 - Task 2.2

    Based on 850 units as if Model H was subcontracted there would be not requirement for holding stock.

    For example with no cost savings any stock that were not sold ie 1000-850 =150 unit, would be carried over until the next accounting period.

    Hope this helps
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:PEV June 2005 - Task 2.2

    Hi

    I think I am just being really stupid here. But it you look at the gross profit data it states the variable and fixed costs, but 1000 units were produced so why is the contribution for the report 104,000/850 instead of 104,000/1000.

    Sorry, but a serious mental block.
    Many thanks
    Eva 8)
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:PEV June 2005 - Task 2.2

    Hi Eva, I had a go at this last week, and I used 850 because in the data it was stated that the sub-contractors could guarantee next day delivery which therefore eliminated any need to hold stock.

    Hope this helps.
    Jackie
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:PEV June 2005 - Task 2.2

    Hi Jackie

    Sorry to go on about this, but I need to get it straight in my head adn I think my brain cell is wearing out.

    The variable costs and fixed costs that are shown are for 1000 units. I understand that you only need 850 units as there is no need for a carry forward, but why is variable costs divided by 850 units when they relate to 1000 units.

    Many thanks if you can explain it in simple terms for my simple brain.

    Many thanks
    Eva
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:PEV June 2005 - Task 2.2

    So far as I could make it out, we were working out what the loss in contribution would be, and since we were only buying and selling 850 units, we had to use that figure. I'm afraid PEV is not my strong point (still trying to work out what is!) so if anyone else has any ideas, I'd be grateful to hear them.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:PEV June 2005 - Task 2.2

    Eva

    Your point shows a good sense of understanding. If you have my answer you may find that I took a different view from the then examiner. I would expect that we would have agreed if we had we met up after his answer had been published. The crux of the difference lay in the future sales of Model H. After all the analysis I guess you have done, and I certainly did boils down to break even.

    Look at the difference in variable cost that the sub-contract would cause and look at the fixed savings.

    You can then say:
    Fixed savings divided by the extra variable cost of subcontracting or if you say it the other way round
    the fixed cost of continuing to produce divided by the saving on variable cost of not sub contracting

    The sub-contract cost is £180
    The in house variable cost of sales in April was £83,000 for 850 units or £97.65 per unit

    So not sub-contracting would save us £82.35 per unit

    Not sub-contracting would incur fixed costs as follows:
      £78,000 per month(as per MD's quote)
    and
      1/12 of £12,000 annual saving (as per MD's quote)
    I.e. £79,000 per month

    If you then do a division:
      Fixed Cost
        saving in variable cost per unit

      £79,000/£82.35 = the number of units you must sell to justify continuing to produce in house.

      = 960 units

      My conclusion is that as this figure is more than the actual sales in April AND more than the budgeted sales it seems unlikely that we will achieve this target.
      Therefore it would be more cost effective to sub-contract.

      I hope that makes sense.

      sandy.hood@chichester.ac.uk
    • System
      System Posts: 100,534 🤖 Admin 🤖
      Re:PEV June 2005 - Task 2.2

      Eva

      My answer doesn't deal with your question, so I have made the typical error of not R' ing The Q

      The actual profit statement shows the turnover and cost of sales and that is so important.

      It does not show cost of production or any closing stock value

      So
        Turnover was £187,000 for selling 850 Model Hs
      and
        Contribution was £104,000
      for selling 850 Model Hs and most important
        the variable cost of £93,000 was the variable cost of the 850 Model Hs we
      sold
    • System
      System Posts: 100,534 🤖 Admin 🤖
      Re:PEV June 2005 - Task 2.2

      Hi Sandy

      Many thanks for your answer, it shows that I didn't read or for that matter understand the question. I will work through your answer and let you know.

      Many thanks for all who tried to help - my simple brain is going into meltdown with PEV.

      Thanks again
      Eva :?

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