Mike is considering setting up a business manufacturing custom bicycle frames. He is a keen cyclist and has many contacts with managers of local bicycle shops who could send business his way. He has found a unit to rent and worked out some preliminary estimates of costs he would have to incur. The firm will manufacture frames made from either aluminium alloy or carbon fibre. Mike's analysis tells you that because aluminium is cheaper and easier to work with each aluminium frame would have a direct materials cost of £100 and direct labour cost of £40. Carbon fibre frames are expected to have a direct materials cost of £200 and direct labour cost of £60. Irrespective of which type of frame is produced, the business will also incur the following annual fixed costs: Rent £12,500 £2,000 Machinery maintenance Spare parts Heat, light, electricity, and water Quality control £500 £4,000 £2,500 The annual machine hours are budgeted to be 1,000 hours. Mi estimates that a single carbon fibre frame will require 20 hours to be manufactured, whereas a single aluminium frame can be manufactured in just 8 hours. The selling prices of the two frames are calculated by adding a 40% mark-up to the total cost of each frame. Questions: A. He also tells you that he would like to earn £15,000 per year from his business. How many units of each product would he have to make and sell in order to earn that amount? Show your workings. B. As Mike's firm is still relatively unknown, he expects he will only be able to sell 55 frames in his first year in business. Which type of bicycle frame should he sell?
Mike is considering setting up a business manufacturing custom bicycle frames. He is a keen cyclist and has many contacts with managers of local bicycle shops who could send business his way. He has found a unit to rent and worked out some preliminary estimates of costs he would have to incur. The firm will manufacture frames made from either aluminium alloy or carbon fibre. Mike's analysis tells you that because aluminium is cheaper and easier to work with each aluminium frame would have a direct materials cost of £100 and direct labour cost of £40. Carbon fibre frames are expected to have a direct materials cost of £200 and direct labour cost of £60. Irrespective of which type of frame is produced, the business will also incur the following annual fixed costs: Rent £12,500 £2,000 Machinery maintenance Spare parts Heat, light, electricity, and water Quality control £500 £4,000 £2,500 The annual machine hours are budgeted to be 1,000 hours. Mi estimates that a single carbon fibre frame will require 20 hours to be manufactured, whereas a single aluminium frame can be manufactured in just 8 hours. The selling prices of the two frames are calculated by adding a 40% mark-up to the total cost of each frame. Questions: A. He also tells you that he would like to earn £15,000 per year from his business. How many units of each product would he have to make and sell in order to earn that amount? Show your workings. B. As Mike's firm is still relatively unknown, he expects he will only be able to sell 55 frames in his first year in business. Which type of bicycle frame should he sell?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
100%
Transcribed Image Text:Mike is considering setting up a business manufacturing custom bicycle frames. He is
a keen cyclist and has many contacts with managers of local bicycle shops who could
send business his way. He has found a unit to rent and worked out some preliminary
estimates of costs he would have to incur.
The firm will manufacture frames made from either aluminium alloy or carbon fibre.
Mike's analysis tells you that because aluminium is cheaper and easier to work with
each aluminium frame would have a direct materials cost of £100 and direct labour
cost of £40. Carbon fibre frames are expected to have a direct materials cost of £200
and direct labour cost of £60.
Irrespective of which type of frame is produced, the business will also incur the
following annual fixed costs:
Rent
£12,500
£2,000
Machinery maintenance
Spare parts
Heat, light, electricity, and water
Quality control
£500
£4,000
£2,500
The annual machine hours are budgeted to be 1,000 hours. Mi estimates that a
single carbon fibre frame will require 20 hours to be manufactured, whereas a single
aluminium frame can be manufactured in just 8 hours. The selling prices of the two
frames are calculated by adding a 40% mark-up to the total cost of each frame.
Questions:
A. He also tells you that he would like to earn £15,000 per year from his business.
How many units of each product would he have to make and sell in order to
earn that amount? Show your workings.
B. As Mike's firm is still relatively unknown, he expects he will only be able to sell
55 frames in his first year in business. Which type of bicycle frame should he
sell?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education