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| 1. | All of the following business costs will usually be classified as direct costs except: | |||||||||
| A. | Business rates | |||||||||
| B. | Raw materials | |||||||||
| C. | Production workers wages | |||||||||
| D. | Depreciation | |||||||||
| 2. | Depreciation as a business cost is | |||||||||
| A. | A fall in the value of foreign currency holdings | |||||||||
| B. | A fall in the value current assets | |||||||||
| C. | A fall in the value of stocks held | |||||||||
| D. | A fall in the value of fixed assets | |||||||||
| 3. | Which of the following is not an indirect cost to business? | |||||||||
| A. | The purchase of photocopying paper | |||||||||
| B. | Allowances for the depreciation of machinery | |||||||||
| C. | Office heating bills | |||||||||
| D. | After sales care | |||||||||
| Questions 4 – 6 share the following answer options: | ||||||||||
| A. | Passenger mile | |||||||||
| B. | Call unit | |||||||||
| C. | Labour hour | |||||||||
| D. | Barrel | |||||||||
| Which of the above cost units will be used by the producers for the following goods and services to compare unit costs and revenues? | ||||||||||
| 4. | Oil | |||||||||
| 5. | Piano lessons | |||||||||
| 6. | Coach travel | |||||||||
| 7. | Which of the following costs is likely to vary with the level of output in a firm? | |||||||||
| A. | Rent | |||||||||
| B. | Overheads | |||||||||
| C. | Component parts | |||||||||
| D. | Insurance | |||||||||
| 8. | What annual depreciation charge would you advise a firm to use against a machine that cost £5,000 and lasts 10 years? | |||||||||
| A. 0 | B. £1,000 | C. £500 | D. £50 | |||||||
| 9. | Which of the following cost items are unlikely to vary with the level of output on a farm? | |||||||||
| A. Seeds | B. Petrol for a tractor | C. Business rates | D. Fertiliser | |||||||
| 10. | A firm wants to expand production by 10,000 units over current levels of output. To do this it will need to hire additional machinery at a cost of 5,000 pounds per year. If the cost of labour and materials to produce each unit of production is 3 pounds, what is the marginal cost of each additional unit? | |||||||||
| A. 70 pence | B. £3.50 | C. £7 | D. £3 | |||||||
| Questions 11 – 14 are based on the following information: ABC Ltd has calculated that its fixed costs are £10,000 per month. Variable costs are £2 per unit produced. | ||||||||||
| 11. | What is the total cost of producing 5,000 units each month? | |||||||||
| A. £12,000 | B. £200,000 | C. £10,000 | D. £20,000 | |||||||
| 12. | What is the average cost of producing each unit of the total output of 5,000 units per month? | |||||||||
| A. £4 | B. £2 | C. £40 | D. £20 | |||||||
| 13. | If ABC Ltd wanted to earn a profit of £10,000 on the production and sale of 5,000 units per month, what price per unit should they charge? | |||||||||
| A. 60 pence | B. £60 | C. £2 | D. £6 | |||||||
| 14. | · List three cost items in a computer assembly plant that could be classified as: (a) direct costs (b) indirect costs · Why are some cost items referred to as ‘fixed’? · Explain what is meant by the marginal cost of production. · Why is information on marginal cost of production is useful to a firm investigating possibilities for expansion? · What is depreciation? Explain using examples. | |||||||||
Case study ‘Waterhouse Waffles’
Waterhouse Waffles produces cream filled waffles for sale in supermarket freezer sections.
The accounts department has calculated that the cost of producing 400,000 waffles each quarter are as follows:
| Direct costs | (£) | Indirect costs per Qtr | (£) | |
| Labour | 70,000 | Rent | 5,100 | |
| Materials | 25,000 | Rates | 1,000 | |
| Power | 5,000 | Power (offices only) | 1,250 | |
| Marketing | 1,550 | |||
| Telephone | ||||
| Business travel | ||||
| Office Supplies | ||||
| Insurance | ||||
| Depreciation | ||||
| Other overheads |
Using this information, Accounts have calculated that the variable cost of producing each waffle is 25 pence. It has also estimated that indirect costs would remain the same for levels of output between 200,000 waffles per quarter and 600,000 waffles per quarter. At 600,000 waffles per quarter the factory is working at full capacity.
To increase output above 600,000 waffles per quarter the firm would need to expand into new premises and install new computer controlled equipment. A nearby factory unit meeting the requirements of such expansion plans has been identified and will cost a total of £9,000 in quarterly rent and rates – £2,900 more than at present. A long-term loan to buy the new equipment would cost £3,300 per quarter in repayments. Other indirect costs are assumed to rise by around £800. The variable cost per waffle would stay the same.
Tasks:
Produce a short report for the Managing director of Waterhouse Waffles, explaining the difference between:
· direct and indirect costs
· fixed and variable costs
· average and marginal costs per waffle
· Also include in your report an explanation of the following terms:
· cost units
· depreciation
Now use a computer spreadsheet to undertake tasks below. Generate computer print outs of your calculations to include in your report.
Using the information above calculate the total cost of producing the following amount of waffles each quarter:
· 200,000
· 400,000
· 600,000
What is average cost of producing each waffle at the present level of output of 400,000 waffles per quarter?
If Waterhouse Waffles wanted to make a profit of £128,000 each quarter from the sale of 400,000 waffles what price should it charge for each waffle?
Suppose the firm does decide to expand production to 800,000 waffles each quarter. Calculate the total cost of this level of output and then use the information on the change in total costs and output to calculate the marginal cost of producing each additional waffle over an output of 600,000.
Assuming the firm is able to sell the additional waffles at the same price chosen in the previous task would you advise the firm to go ahead with its expansion plans?
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