Marginal Costing

  1. (a) Shah Ltd needs a component for one of its products. It can subcontract production of the component to a subcontractor who will provide the components for £20 each. Shah has the spare capacity. Fixed costs are £6 per unit


Shah Ltd can produce the components internally for a variable cost of £15 per component?

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(b) Assume the Shah Ltd has no spare capacity, so it can only produce the component internally by reducing output of another of its products. While it is making each component, it will lose contributions of £12 from the other product.


Should the component be subcontracted or produced internally?


(c) What other factors would you consider when making a make or buy decision?


  1. Goodsports Ltd is a retail shop that operates through 3 departments, all in the same premises. The three departments occupy roughly equal-sized areas of the premises. Costs are split 2/3 variable costs 1/3 fixed. The trading results for the year just finished showed the following:


  Sports Equip Sports Clothes General Clothes Total
  £000 £000 £000 £000
Sales Revenue 254 183 97 534
Cost (213) (163) (106) (482)
Profit/Loss 41 20 (9) 52


Should Goodsports Ltd close the General Clothes department?

  1. A business makes three products A , B, C. All three products require the use of two types of machine: cutting machines and assembling machines. Estimates for next year include the following:
  A B C
Selling price (£/unit) 25 30 18
Sales demand (units) 2,500 3,400 5,100
Material Cost (£/Unit) 12 13 10
Variable Production cost (£/Unit) 7 4 3
Time required per unit on cutting machine (hrs) 1.0 1.0 0.5
Time required per unit on assembling machine (hrs) 0.5 1.0 0.5


Fixed costs for next year is expected to total £42,000. It is business’s policy for each unit of production to absorb these in production to its total variable cost

The business has cutting machine capacity of 5,500 hours a year and assembling machine capacity of 8,000 hours a year

Which products in which quantities should the business plan to make next year on the basis of the above information

What is the maximum price per product that it would be worth the business paying to a subcontractor to carry out that part of the work that could not be done internally?