The directors of Machiq Limited (see previous case studies) decided to reject
Esmeralda’s takeover bid and instead devoted their talents to developing new products.
Trixie, the managing director, had been sent an e-mail containing a recipe for a vanishing
potion and decided to investigate the possibility of setting up a separate division to
produce and promote it. The creator of the recipe, who had signed herself ‘Mrs Eadale’,
said that the potion was totally harmless and caused only temporary invisibility. She also
insisted that, as an absolute condition of her allowing Machiq Limited to use the recipe
free of charge, the directors must test the potion on themselves before selling it to the
general public.
Chiquita, the finance director, produced the following information:
Maximum production and sales p.a. (bottles) 15,000
| £ | |
| Selling price per bottle | 14 |
| Ingredients per bottle | 3 |
| Cost of bottle and label | 1 |
| Direct labour cost per bottle | 2 |
| Rent, rates and other fixed costs relating to bottling division | 20,000 |
| Portion of company’s general overheads allocated to bottling division | 130,000 |
Required
(a) Using the absorption costing technique, would the new division be viable? Show
your calculations.
(b) What recommendation might have been made if marginal costing had been used to
evaluate the proposed new division? Show your calculations.
(c) Using marginal costing techniques, calculate:
(i) the break-even point (in bottles)
(ii) the number of bottles which would have to be sold to earn £16,000 profit for
the bottling division
(iii) how much profit or loss would be made if only 4,000 bottles were sold.
A footnote
Marvin, Chiquita and Trixie set up the bottling division. They sent an invitation to
Esmeralda to join them at a celebration champagne ‘test the potion’ party to show
there were no hard feelings after her failed takeover bid. Esmeralda replied saying that
she would be very pleased to watch the three directors vanish and looked forward to
toasting their health in champagne beforehand. Unfortunately, a waiter hired for the
occasion inadvertently poured the potion into the champagne glasses, and the directors,
after raising their glasses to the toast of ‘Mrs Eadale’, drank the ‘champagne’ and
promptly disappeared without trace.
(b) The antidote to the potion
The detective investigating the mysterious disappearance of the directors of Machiq
Limited was searching the home of Esmeralda, the chief suspect in the case. He opened
a drawer and extracted a notepad with the word ‘Antidote’ written on the front cover.
He turned the page, and read as follows:
The antidote to the vanishing potion can be manufactured in 1,000 bottle batches
as follows:
Firstly, the mixing process: Combine 10 kg of Ingredient A with 5 kg of
Ingredient B. One person to mix by hand for 10 hours and then transfer to the
liquidising process. There the three liquidising workers will each spend 4 hours
adding 14 kg of Ingredient C whilst supervising the liquidising procedure. Threequarters
of the mixture will evaporate in the liquidising process as a normal loss.
Finally, the antidote must be bottled. This process will take 2 persons 5 hours
each.
Ingredients can all be obtained from Stoob the Chemist at the following prices:
Ingredient A £80 per kg, Ingredient B £60 per kg and Ingredient C £40 per kg. The
mixing operative is paid £4.50 per hour, liquidising workers are each paid £4.75
per hour and the bottling operatives are paid £5.00 per hour. Bottles cost £1 each.
Other (fixed) overheads would be mixing £590, liquidising £420, bottling £380.
Calculate the cost of manufacturing one bottle of antidote.
