e-Consult | Revision Qns

1.

A manufacturing company has total costs of £25,000. Fixed costs are £10,000. Calculate the variable costs and the total variable costs. Calculate the average variable cost (AVC) and the average total cost (ATC).

Answer:

Variable Costs = Total Costs - Fixed Costs

Variable Costs = £25,000 - £10,000 = £15,000

Total Variable Costs = £15,000

Average Variable Cost (AVC) = Variable Costs / Quantity

To calculate the AVC, we need the quantity of goods produced. We are not given this in the question. Therefore, we cannot calculate the AVC. However, we can calculate the Average Total Cost (ATC) if we assume a quantity. Let's assume the company produced 3,000 units.

Average Total Cost (ATC) = Total Costs / Quantity

ATC = £25,000 / 3,000 = £8.33 per unit (approximately)

Variable Costs

£15,000

Average Variable Cost (AVC)

Cannot be calculated without the quantity produced.

Average Total Cost (ATC)

£8.33 per unit (assuming 3,000 units produced)

2.

A small bakery sells cakes, pastries and bread. In a particular week, the bakery’s fixed costs were £1,500. Variable costs were £8 per cake, £5 per pastry and £2 per loaf of bread. The bakery sold 200 cakes, 150 pastries and 300 loaves of bread during the week. Calculate the total variable costs incurred by the bakery during the week.

Answer:

Total variable costs = (Number of cakes x Variable cost per cake) + (Number of pastries x Variable cost per pastry) + (Number of loaves of bread x Variable cost per loaf of bread)

Total variable costs = (200 x £8) + (150 x £5) + (300 x £2)

Total variable costs = £1600 + £750 + £600

Total variable costs = £2950

3.

A supplier offers a business a discount on raw materials. The business currently buys a material for £10 per unit. The supplier offers the material for £8 per unit, but requires a minimum order of 500 units. The business currently uses 2,000 units per year. Using cost data, advise the business whether to accept the supplier's offer and explain your reasoning. Include a calculation to support your advice.

Current Cost:

Current unit cost = £10

Current annual usage = 2,000 units

Current annual cost = £10 x 2,000 = £20,000

Cost with Supplier's Offer:

Unit cost with supplier = £8

Minimum order = 500 units

Since the business uses 2,000 units per year, it needs to place multiple orders. The business should place enough orders to meet its annual demand while satisfying the minimum order requirement. In this case, it needs to place 4 orders of 500 units (4 x 500 = 2,000 units).

Calculate the total cost with the supplier's offer:

Total cost = Number of orders x Minimum order x Unit cost

Total cost = 4 x 500 x £8 = £16,000

Comparison and Advice:

The current annual cost is £20,000. The cost with the supplier's offer is £16,000. Therefore, the business should accept the supplier's offer. This will result in a saving of £4,000 per year (£20,000 - £16,000). The business should carefully consider the implications of placing multiple orders and ensure that it has sufficient storage space. However, the cost savings are significant enough to justify accepting the offer, provided the storage requirements can be met. The business should also consider the reliability of the supplier and the potential impact of any delays in delivery.

4.4.1 Identify and classify costs (3)