Alex is about to open his own company, Big Wall Solutions, which will make and sell...

 

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Alex is about to open his own company, Big Wall Solutions, which will make and sell either ultralight climbing harnesses or uniquely comfortable rock climbing shoes. He knows you studied management accounting at university and asks you to help him choose the product line for his business. Alex emphasises that he wants his firm to make and sell only one product. He presents you with the following estimates of direct and indirect costs he expects his firm to incur depending on the product it chooses: Big Wall Solutions Summary of expected costs Harness Climbing shoes £100 Direct materials cost per unit Direct labour cost per unit Indirect labour costs Rent and rates £148 £80 Heating, lighting, and power Indirect materials cost Other indirect costs Labour hours for normal activity £8,000 £6,000 £4,000 £30,000 £20,000 32,000 hours £64 £28,000 £8,000 £6,000 £22,000 £16,000 40,000 hours Alex tells you that all indirect costs are fixed and that he expects each unit of his climbing harness to take 4 hours of labour to produce, whereas each unit of the climbing shoes will take 2 hours of labour to produce. He also tells you that he plans to charge his customers a price which is going to be 30% higher than the total unit cost, regardless of which product line is selected. Required: A. Calculate the unit total cost and the unit selling price for the two products Alex is considering. Show your workings. (12 marks) B. Alex would like to find out how many units of each product he would have to make and sell in order to break even and asks you to calculate the break-even volumes of sales. Show your workings. (6 marks) C. Alex is quite risk-averse and wants to know what his firm's margin of safety would be, both in units and in percentage terms, and asks you to calculate those figures. He tells you that his analysis of the local market indicates that his potential customers would be willing to buy 1,800 units of his harness or 2,000' units of climbing shoes. Show your workings. (4 marks) Alex is about to open his own company, Big Wall Solutions, which will make and sell either ultralight climbing harnesses or uniquely comfortable rock climbing shoes. He knows you studied management accounting at university and asks you to help him choose the product line for his business. Alex emphasises that he wants his firm to make and sell only one product. He presents you with the following estimates of direct and indirect costs he expects his firm to incur depending on the product it chooses: Big Wall Solutions Summary of expected costs Harness Climbing shoes £100 Direct materials cost per unit Direct labour cost per unit Indirect labour costs Rent and rates £148 £80 Heating, lighting, and power Indirect materials cost Other indirect costs Labour hours for normal activity £8,000 £6,000 £4,000 £30,000 £20,000 32,000 hours £64 £28,000 £8,000 £6,000 £22,000 £16,000 40,000 hours Alex tells you that all indirect costs are fixed and that he expects each unit of his climbing harness to take 4 hours of labour to produce, whereas each unit of the climbing shoes will take 2 hours of labour to produce. He also tells you that he plans to charge his customers a price which is going to be 30% higher than the total unit cost, regardless of which product line is selected. Required: A. Calculate the unit total cost and the unit selling price for the two products Alex is considering. Show your workings. (12 marks) B. Alex would like to find out how many units of each product he would have to make and sell in order to break even and asks you to calculate the break-even volumes of sales. Show your workings. (6 marks) C. Alex is quite risk-averse and wants to know what his firm's margin of safety would be, both in units and in percentage terms, and asks you to calculate those figures. He tells you that his analysis of the local market indicates that his potential customers would be willing to buy 1,800 units of his harness or 2,000' units of climbing shoes. Show your workings. (4 marks)

Answer rating: 100% (QA)

For HarnessUnit Total Cost is 23650 Unit Selling Price is 307... View the full answer