Decision Making & Control
Please complete all two questions. Question 1
Patel Ltd is a small start-up family-owned business that manufactures and sells a single
product to customers in UK. The company has recently been approached by a UK university for an order of 75,000 office sets (easy desk & chair) for the opening of four new campuses, which is expected to be their total sales for the year. The CEO is currently reviewing the following information for this order:

Cost per unit
£

Direct materials per chair
13

Direct labour per chair
9

Variable selling & distribution cost
5

Other variable production overhead
3

Total fixed cost
360,000

The CEO is evaluating the possibility of pricing £36 per office set.
Required:
As a team member of accounting department, you are required to provide the following information to the CEO:
Explain why it is important to classify cost in terms of behaviours, and how cost can be classified by different behaviours.

Calculate the break-even point and margin of safety if Patel Ltd prices their office set at
£36 per unit. Draw the break-even chart that shows break-even point and margin of safety.

The CEO has noticed the following details on the actual total fixed costs for the year ended 30 June 2019 and is keen to know the impact on profit if product is valued at either marginal cost or full cost (absorption cost):

£

Factory Rent
46,000

Factory Power Consumption
40,000

Factory Wages
120,000

Storeroom Wages
36,000

Depreciation of factory equipment
28,000

Advertising Expenses
38,000

Administrative Expenses
32,000

Fixed selling & distribution cost
20,000

Total
360,000

The budgeted and actual production units for the year are as follow, with no opening inventory:

Production units

Budgeted
90,000

Actual
91,000