Makesmart Ltd is a company that manufactures coffee machines to sell directly to the public. While...

  
 

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Makesmart Ltd is a company that manufactures coffee machines to sell directly to the public. While the coffee machines can come in different colours and features, they sell two main designs: the 'Superior', which filters coffee Italian style and the 'Grande' which, in addition to filtering coffee Italian style, has a steam spout for frothing milk. The home market for both products is very competitive. In recent years, the demand for the Grande has been rising, and demand for the Superior has been falling. Makesmart Ltd currently uses traditional absorption costing and cost-plus pricing. Prices are based on production cost plus 24% (approximately) in order to try to meet pricing pressures. The company needs to make a markup of 24% to satisfy the requirements of the shareholders as well. Selling price per unit Material usage per unit Labour per unit Production overheads per unit £25.00 per machine hour Total production cost per unit Profit per unit 5 kg 2 hrs Superior £ 68.42 15.00 12.00 25.00 52.00 16.42 8 kg 3 hrs Grande £ 121.05 24.00 18.00 50.00 92.00 29.05 Budgeted information for both coffee machines, using the absorption costing system, is as follows: The board of directors has been investigating alternative costing systems to help in their need for competitiveness. The management accounting team have carried out in-depth analysis and have prepared the following data: Machining costs Set up costs Store movement costs Total overhead £ Cost Drivers 900,000 Machine hours 1,600,000 Number of batches 1,500,000 Number of movements £4,000,000 The production team collected the following data: Cost driver Information Budgeted production (units) Number of batches Number of store movements Number of machine hours per unit Superior Grande 100,000 30,000 100 100 100 150 1 2 (a) Calculate the total cost per unit, and the profit per unit, for each product, using Activity Based Costing. You should assume that the directors would not immediately change the prices charged to customers. They would review prices after the marketing department has conducted further market research. (21 marks) (b) Based upon the information now known from your calculations in (a) above and assuming that a cost + 24% markup would be applied to the revised ABC- based costing, calculate and discuss how Makesmart Ltd could compete where the competitions' price for the Superior equivalent is £63.60 and the Grande equivalent sells for £124.50. (10 marks) (c) Makesmart Ltd is launching a new coffee pod that fits into their coffee machines. These pods are manufactured using innovative ecofriendly materials to make the coffee suitable for an overseas market where environmentally friendly products are in more demand than in the home market. Discuss the most appropriate pricing strategy for the Superior and Grande coffee machines, as well as the ecofriendly coffee pods as they enter into the new international market. You may want to consider the following pricing systems in your explanation: (i) Target costing and target pricing (ii) Penetration pricing (iii) Price skimming. (9 marks) (Total 40 marks) Makesmart Ltd is a company that manufactures coffee machines to sell directly to the public. While the coffee machines can come in different colours and features, they sell two main designs: the 'Superior', which filters coffee Italian style and the 'Grande' which, in addition to filtering coffee Italian style, has a steam spout for frothing milk. The home market for both products is very competitive. In recent years, the demand for the Grande has been rising, and demand for the Superior has been falling. Makesmart Ltd currently uses traditional absorption costing and cost-plus pricing. Prices are based on production cost plus 24% (approximately) in order to try to meet pricing pressures. The company needs to make a markup of 24% to satisfy the requirements of the shareholders as well. Selling price per unit Material usage per unit Labour per unit Production overheads per unit £25.00 per machine hour Total production cost per unit Profit per unit 5 kg 2 hrs Superior £ 68.42 15.00 12.00 25.00 52.00 16.42 8 kg 3 hrs Grande £ 121.05 24.00 18.00 50.00 92.00 29.05 Budgeted information for both coffee machines, using the absorption costing system, is as follows: The board of directors has been investigating alternative costing systems to help in their need for competitiveness. The management accounting team have carried out in-depth analysis and have prepared the following data: Machining costs Set up costs Store movement costs Total overhead £ Cost Drivers 900,000 Machine hours 1,600,000 Number of batches 1,500,000 Number of movements £4,000,000 The production team collected the following data: Cost driver Information Budgeted production (units) Number of batches Number of store movements Number of machine hours per unit Superior Grande 100,000 30,000 100 100 100 150 1 2 (a) Calculate the total cost per unit, and the profit per unit, for each product, using Activity Based Costing. You should assume that the directors would not immediately change the prices charged to customers. They would review prices after the marketing department has conducted further market research. (21 marks) (b) Based upon the information now known from your calculations in (a) above and assuming that a cost + 24% markup would be applied to the revised ABC- based costing, calculate and discuss how Makesmart Ltd could compete where the competitions' price for the Superior equivalent is £63.60 and the Grande equivalent sells for £124.50. (10 marks) (c) Makesmart Ltd is launching a new coffee pod that fits into their coffee machines. These pods are manufactured using innovative ecofriendly materials to make the coffee suitable for an overseas market where environmentally friendly products are in more demand than in the home market. Discuss the most appropriate pricing strategy for the Superior and Grande coffee machines, as well as the ecofriendly coffee pods as they enter into the new international market. You may want to consider the following pricing systems in your explanation: (i) Target costing and target pricing (ii) Penetration pricing (iii) Price skimming. (9 marks) (Total 40 marks)

Answer rating: 100% (QA)

a Cost 218400 PRET Patro Particulus 90000 Machining cost 1600000 set up ... View the full answer