Question

Vital Vitamins has been successfully producing herbal remedies for many years but recently its profit margins have dropped and its managers are reviewing production overheads to try to identify the problem.

The table below shows some of the information under review for a product called ‘Supplement C’;

	2017	2018	2019
Production overheads	£27,901	£30,869	£30,713
Number of units produced	32,425	36,992	36,751

Required:
a) Using the high low method, ascertain the fixed production overheads and

variable production overheads for producing Supplement C.

Other costs relating to Supplement C are shown below:

Ingredients	42 pence per unit
Machine time	20 minutes per unit
Variable Selling overheads	22 pence per unit
Variable Admin overheads	12 pence per unit

b) If planned production quantity is 40,000 units and fixed costs are to be totally absorbed equally by the units produced, calculate the share of fixed production overheads per unit.

c) Vital Vitamins adds a mark up on full cost of 40% to arrive at selling price.

Calculate the selling price of Supplement C based on this method.

d) Calculate selling price based on 40% mark up on marginal cost.

e) Outline an argument for the use of each of the pricing methods calculated above.

f) The production manager wants to buy new equipment that would avoid the use of potentially dangerous chemicals currently in use in the production process. She is concerned about the possible risk of contamination. The sales director is worried about the increase in costs and subsequent effect on selling price.

Explain why short term increases in costs can sometimes lead to financial benefits in the longer term.

Answer 1