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ACCT19060 Management Accounting

tag 0 Download 5 Pages / 1,092 Words tag 11-12-2020


Valdivia Company produces remote control helicopters. The company has done research to improve the OS1 model. Consequently, the OS2 model was developed. The general manager of Valdivia has to decide whether to release the OS2 model on 1 October 2018, in time for Christmas.

The major problem is that Valdivia Company has overstocked the OS1 model. The general manager knows that once the OS2 model is introduced, Valdivia Company will not be able to sell any OS1 model helicopters. The general manager is wondering if it might be better to continue to sell the OS1 model until the inventory is sold out, anticipated to be around 1 January 2019, and then to introduce the OS2 model.

The following information is available per unit:


OS1 model$

OS2 model $

Selling price

2 020

2 340

Direct materials costs



Direct labour costs



Variable overhead costs



Development cost



Marketing and administrative cost



Total cost per unit

1 570

1 772

Operating profit per unit



Development cost per unit for each product equals the total costs of developing the helicopters divided by the anticipated unit sales over the life of the product. Marketing and administrative costs are fixed costs in 2018, incurred to support all marketing and administrative activities of Valdivia Company. Marketing and administrative costs are allocated to products on the basis of the budgeted revenues of each product.


(a)  Based on a quantitative (numerical) analysis, clearly identify relevant revenues and costs and state whether Valdivia should introduce the OS2 model on 1 October 2018 or wait until 1 January 2019? Justify your answer. Show all calculations. Clearly state which costs are irrelevant and why they are irrelevant.                                                           

(b)  Discuss at least four (4) qualitative factors that the general manager has to consider in making a decision. You will receive 0.5 mark for mentioning a factor and 1 mark for discussing and elaborating on the factor. You will not receive any marks for discussing quantitative factors. Word limit: 300 words with a 10% margin.                                                  Continued on next page question 2

Question 2

The Caleta Division of Puerto Ltd makes and sells tables and chairs. The following estimated revenue and cost information for the 2018 year for the division is available:


4 000 Tables

24 000 Chairs



$1 000 000

$2 000 000

$3 000 000

Variable direct materials and direct labour costs

600 000

1 050 000

1 650 000

Depreciation on equipment used exclusively by each product line

84 000

116 000

200 000

Marketing and distribution costs:

$80 000 (fixed) + ($750 x 80 shipments)

$202 500 (fixed) + ($750 x 90 shipments)


140 000



270 000

410 000

General administration costs of the division allocated to product lines on the basis of revenue

220 000

440 000

660 000

Corporate office costs allocated to product lines on the basis of revenues

100 000

200 000

300 000

Operating profit (loss)

$(144 000)

$(76 000)

$(220 000)

Additional information:

  1. On 1 January 2018 the equipment of Caleta Division had a carrying value of $200 000 and zero disposal value. Any equipment not used will remain idle.
  2. Fixed marketing and distribution costs of a product line can be avoided if the line is discontinued.
  3. General administration costs of the division and corporate office costs will not change if sales of individual product lines are increased or decreased or if product lines are added or dropped.
  4. Assume that to make and sell 4 000 more tables, Caleta Division would have to acquire additional equipment costing $95 000 with a one-year useful life and zero terminal disposal value.
  5. Assume that the fixed marketing and distribution costs would not change but that the number of shipments would double if 4 000 more tables are made and sold.


(a)   What would be the effect on Caleta Division’s operating profit if it were to sell 4 000 more tables? State if the Caleta Division should sell the additional 4 000 tables and why. Show all calculations and state which costs are irrelevant. Justify your answer.                  

(b)   Given that Caleta Division’s expected operating loss when selling 4 000 tables only is $220 000, should Puerto Ltd shut it down? Assume that shutting down the Caleta Division will have no effect on corporate office costs but will lead to savings of all general administration costs of the division. Show all calculations and justify your decision.

Question 3

Discuss the criteria of irrelevant costs.

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