# 3. Costing Q&A.docx - QUESTIONS AND ANSWERS COSTING AND...

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QUESTIONS AND ANSWERSCOSTING AND VARIANCE ANALYSIS1
Question 1 – Relevant CostingA division of Sachsen Motor Werke (SMW) has received an enquiry from one of itscustomers for a special order for a component which will require 1,000 skilled labour hoursand which incur additional variable costs of €8,000. Skilled labour is currently in short supplyand if SMW accepts the order it would be necessary to reduce production of component XY.Details of the cost per unit and selling price of XY are as follows:Unit sales price€88Less direct labour (4 hours x €10 per hour)-€40Other variable costs-€12Contribution to profits€36RequiredWhat is the minimum selling price SMW should accept for the special order?2
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Question 2 – Relevant CostingThis is the 2014 income statement for Danube Company, a manufacturer of blue jeans. Thefirm produced 2,000,000 pairs of jeans that year.TotalPer Unit€mSales€40.0€20.0Less: cost of goods sold-€24.0-€12.0Gross profit€16.0€8.0Less: selling and administration expenses-€15.0-€7.5Operating income€1.0€0.5At the start of 2015, the company’s president Mary-Lou Adams died unexpectedly. Her son,Enda, became the new president. Having worked for 15 years in the marketing side of thebusiness, he knew very little about accounting and manufacturing (which had been hismother’s strengths). Enda now has several questions. You are the firm’s Chief FinancialOfficer.Required1.To prepare better answers, you decide to recast the income statement incontribution form (separating fixed and variable costs and thereby showingcontribution margin). Variable manufacturing expenses were €19m in 2014 whilevariable selling and administration expenses were €9 million. Revise the incomestatement in contribution form.2.Enda says “I can’t understand the financial statements until I properly understand keyfinancial terms. My mother’s notes refer to (i) full manufacturing cost, (ii) variablecost, (iii) full cost, (iv) gross margin, and (v) contribution margin. Using 2014 data, listthese costs (showing both their total and per unit amounts).3.

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