AC4003 Calculation of Operating Cost
The above company has a reputation for supplying expensive looking invitation cards for special occasions. It has been asked to quote for wedding invitations and has estimated the cost of printing 100 invitation cards as follows:
Preparation work 4 hours @ £30 per hour
Design work £120
Paper/Card £80
Printing £30
Direct Labour 2 hour @£23 per hour
Fixed overheads £150
Preparation work costs, design work costs and fixed overheads will remain the same irrespective of how many invitation cards are printed.All other costs will vary in proportion to the number of invitations printed. Profit mark-up is 50% of total costs.
As being the firm’s accountant you are required to:
- Using a spreadsheet prepare an operating statement for output levels of 100, 300, 550, 1000 and 1250 invitation cards which will show the following:
- Total costs
- Total profit
- Selling price per 100 invitations
- Assume there are three partners in the business called A B and C, calculate the profit for each partner in the ratio of 50:30:20
- Prepare a chart to show the profit at each output level
- Comment on the effect of increase in paper costs to £90 per 100 invitations
- Comment on the effect of 25% increase in all fixed costs.
Answer:
|
Statement Showing calculation of operating cost, Profit and selling price | |||||||
|
Number of cards | |||||||
|
Particulars |
Hours |
Rate per Invitation |
100 |
300 |
550 |
1000 |
1250 |
|
100 |
Cost | ||||||
|
preparation work |
4 |
30 |
£ 120.00 |
£ 120.00 |
£ 120.00 |
£ 120.00 |
£ 120.00 |
|
Design Work |
120 |
£ 120.00 |
£ 120.00 |
£ 120.00 |
£ 120.00 |
£ 120.00 | |
|
Paper Card |
80 |
£ 80.00 |
£ 240.00 |
£ 440.00 |
£ 800.00 |
£ 1,000.00 | |
|
Printing |
30 |
£ 30.00 |
£ 30.00 |
£ 30.00 |
£ 30.00 |
£ 30.00 | |
|
Direct Labor |
2 |
23 |
£ 46.00 |
£ 138.00 |
£ 253.00 |
£ 460.00 |
£ 575.00 |
|
Fixed overheads |
150 |
£ 150.00 |
£ 150.00 |
£ 150.00 |
£ 150.00 |
£ 150.00 | |
|
Total cost |
£ 546.00 |
£ 798.00 |
£1,113.00 |
£ 1,680.00 |
£ 1,995.00 | ||
|
Profit |
50% |
£ 273.00 |
£ 399.00 |
£ 556.50 |
£ 840.00 |
£ 997.50 | |
|
Total sales |
£ 819.00 |
£ 1,197.00 |
£1,669.50 |
£ 2,520.00 |
£ 2,992.50 | ||
|
Selling price per 100 |
£ 819.00 |
£ 399.00 |
£ 303.55 |
£ 252.00 |
£ 239.40 | ||
|
Statement Showing calculation of Profit for each partner | ||||
|
Partners |
A |
B |
C | |
|
Profit Sharing Ratio |
50% |
30% |
20% | |
|
No. of Cards |
Profit |
Share of Each Partner | ||
|
100 |
£ 273.00 |
£ 136.50 |
£ 81.90 |
£ 54.60 |
|
300 |
£ 399.00 |
£ 199.50 |
£ 119.70 |
£ 79.80 |
|
550 |
£ 556.50 |
£ 278.25 |
£ 166.95 |
£ 111.30 |
|
1000 |
£ 840.00 |
£ 420.00 |
£ 252.00 |
£ 168.00 |
|
1250 |
£ 997.50 |
£ 498.75 |
£ 299.25 |
£ 199.50 |
The increase in paper cost will result in increase in selling price. However, if the old selling price is maintained then it becomes unprofitable. The calculations are shown below:
|
Statement Showing calculation of operating cost, Profit and selling price | |||||||
|
Number of cards | |||||||
|
Particulars |
Hours |
Rate per Invitation |
100 |
300 |
550 |
1000 |
1250 |
|
100 |
Cost | ||||||
|
preparation work |
4 |
30 |
£ 120.00 |
£ 120.00 |
£ 120.00 |
£ 120.00 |
£ 120.00 |
|
Design Work |
120 |
£ 120.00 |
£ 120.00 |
£ 120.00 |
£ 120.00 |
£ 120.00 | |
|
Paper Card |
90 |
£ 90.00 |
£ 270.00 |
£ 495.00 |
£ 900.00 |
£ 1,125.00 | |
|
Printing |
30 |
£ 30.00 |
£ 30.00 |
£ 30.00 |
£ 30.00 |
£ 30.00 | |
|
Direct Labour |
2 |
23 |
£ 46.00 |
£ 138.00 |
£ 253.00 |
£ 460.00 |
£ 575.00 |
|
Fixed overheads |
150 |
£ 150.00 |
£ 150.00 |
£ 150.00 |
£ 150.00 |
£ 150.00 | |
|
Total cost |
£ 556.00 |
£ 828.00 |
£ 1,168.00 |
£ 1,780.00 |
£ 2,120.00 | ||
|
Profit |
50% |
£ 278.00 |
£ 414.00 |
£ 584.00 |
£ 890.00 |
£ 1,060.00 | |
|
Total sales |
£ 834.00 |
£ 1,242.00 |
£ 1,752.00 |
£ 2,670.00 |
£ 3,180.00 | ||
|
Selling price per 100 |
£ 834.00 |
£ 414.00 |
£ 318.55 |
£ 267.00 |
£ 254.40 | ||
|
Existing selling Price |
£ 819.00 |
£ 399.00 |
£ 303.55 |
£ 252.00 |
£ 239.40 | ||
|
Profit based on old selling price |
£ 263.00 |
-£ 429.00 |
-£ 864.45 |
-£ 1,528.00 |
-£ 1,880.60 | ||
The increase in fixed costs results in increase in selling price. If the selling price is not revised then it becomes unprofitable.
|
Statement showing Calculation of Profit on change in fixed cost | |||||||||
|
Number of cards Printed | |||||||||
|
Particulars |
Old Rate |
Percentage Increase |
Hours |
Rate per |
100 |
300 |
550 |
1000 |
1250 |
|
100 |
Cost | ||||||||
|
Preparation work |
30 |
25% |
4 |
£ 37.50 |
£ 150.00 |
£ 150.00 |
£ - |
£ - |
£ - |
|
Design Work |
120 |
25% |
£ 150.00 |
£ 37.50 |
£ 37.50 |
£ 37.50 |
£ 37.50 |
£ 37.50 | |
|
Paper Card |
80 |
£ 80.00 |
£ 80.00 |
£ 240.00 |
£ 440.00 |
£ 800.00 |
£ 1,000.00 | ||
|
Printing |
30 |
£ 30.00 |
£ 30.00 |
£ 80.00 |
£ 80.00 |
£ 80.00 |
£ 80.00 | ||
|
Direct Labour |
23 |
2 |
£ 23.00 |
£ 46.00 |
£ 138.00 |
£ 253.00 |
£ 460.00 |
£ 575.00 | |
|
Fixed overheads |
150 |
25% |
£ 187.50 |
£ 187.50 |
£ 23.00 |
£ 23.00 |
£ 23.00 |
£ 23.00 | |
|
Total cost |
£ 531.00 |
£ 668.50 |
£ 833.50 |
£ 1,400.50 |
£ 1,715.50 | ||||
|
Profit |
50% |
£ 265.50 |
£ 669.00 |
£ 834.00 |
£ 1,401.00 |
£ 1,716.00 | |||
|
Total sales |
£ 796.50 |
£ 1,337.50 |
£ 1,667.50 |
£ 2,801.50 |
£ 3,431.50 | ||||
|
Selling price per 100 |
£ 796.50 |
£ 445.83 |
£ 303.18 |
£ 280.15 |
£ 274.52 | ||||
|
Existing selling Price |
£ 819.00 |
£ 399.00 |
£ 303.55 |
£ 252.00 |
£ 239.40 | ||||
|
Profit based on old selling price |
£ 288.00 |
-£ 269.50 |
-£ 529.95 |
-£ 1,148.50 |
-£ 1,476.10 | ||||
Bibliography
Addison, P.S., 2017. The illustrated wavelet transform handbook: introductory theory and applications in science, engineering, medicine and finance. CRC press.
Damodaran, A., 2016. Damodaran on valuation: security analysis for investment and corporate finance (Vol. 324). John Wiley & Sons.
Härdle, W.K., Hautsch, N. and Overbeck, L. eds., 2017. Applied quantitative finance (Vol. 2). Springer.
Minsky, H., 2016. Can" it" happen again?: essays on instability and finance. Routledge.
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