Nathan Ltd is a new company that makes a single product, N. For October 2022 (their first month of production and sales), 14,000 were expected to be produced and sold, leaving no closing inventory of N at the end of October. The standard cost card for N is as follows:

The variable production overhead is based on labour hours. The company is expecting to incur fixed production costs of £100,000 per month. The company uses a marginal-costing basis.

Calculate the budgeted profit for October 2022 given the standard costs and expected production and sales of 14,000 units.

[3 marks]

In reality, the company produced and sold 9,000 units in October 2022 for a total revenue of £450,000. 25,000 kgs of Material A were purchased for a total of £81,000. 24,000 kgs of Material B were purchased for a total of £24,960. The labour force took 14,000 hours to produce October’s output at a labour cost of £196,000. The actual variable overhead cost was £28,000 and the fixed costs were £85,000.

(b) (i) Calculate all relevant variances, including material mix and yield variances.

[15 marks]

(ii) Comment on possible reasons for the variances found in part (i).

[5 marks]

(c) Discuss the factors that will determine whether a company (not necessarily Nathan Ltd) would want to investigate the reasons behind adverse variances and whether these variances would be used as a performance measurement indicator.

[8 marks]

Having conducted further market research, Nathan Ltd now know that for every increase of £1 in the standard selling unit price of N of £47, demand for N would decrease by 500 units, and that a £1 decrease in the selling price would increase demand by the same amount.

(d) Using the standard selling price of N of £47, the budgeted demand of 14,000 units from part (a) and the budgeted variable cost of N of £33.30 per unit, calculate the expected selling price of N (to the nearest penny) and the quantity of units (to the nearest unit) sold that would maximise profit for Nathan Ltd.

[6 marks]

(e) What could Nathan Ltd do with the information gleaned from part (b) to further analyse the sales price variance and sales volume variance? NOTE: You do not need to make any calculations to answer this part.

[3 marks]

Answer rating: 100% (QA)

The detailed answer for the above question is provided below a The budgeted profit for October 2022 is 420000 This is calculated as follows Total expected sales revenue 14000 units x 47 658000 Total e... View the full answer