Question

AND THE USE OF CALCULATORS SPREADSHEETS 2. PLEASE MAKE SURE TO WRITE Sttolal ANSWER EXPLANATIONS THAT ARE SUPPORTED BY YOUR CALCULATIONS WHEN ASKED IN A GINEN QUESTION 3. PLEASE USE EXCEL TO CALCULATE AND SHow WORKINGS. THANKS.

Answer 1

The above question can be divided into three parts.

First question: what is the relevant cost for decision making to produce the unfinished goods rather than finished goods ?

Answer: First, let us know what is relevant cost ?

Relevant costs are those costs which are considered for the purpose of enforcing a decision. Variable costs are considered as relevant cost because, if a certain decision to produce a product is withdrawn, then variable costs won't occur. Hence, these costs influence the decision making since in order to produce the product, these costs are necessary. On the other hand, Fixed costs are irrelevant cost due to the fact that they are incurred regardless of whether to produce the product or not. Hence, in the is case, we consider only the variable costs.

Particulars	amount $
Relevant costs: only variable costs
Direct material	76.65
Direct labour	46.80
Overhead: only variable overhead is considered
i.e., 80% of direct labour (46.8 * 0.8)	37.44
Total	160.89

Second question: what should be the selling price for steel rings given it can bear 4 times the competitors plastic range ?

Answer: The profit of competitors plastic range = Sales - Total cost

= $ 320.4 - $66.60

= $ 253.8

therefore, the profit for steel rings should be = $253.80 / 4

= $63.45

the correct selling price of steel rings= total cost + desired profit as calculated above

= $263.85 + $63.45 = $327.30

Third question: Whether to produce the plastic ring or hire German labour from relevant cost point of view.

Answer: Since, German labour can be hired at 70% of normal rate. 30% of relevant cost is decreased.Therefore it is recommended to hire the German labour.