The Rewehon Department at Greenwich Plc Manufactures High Quality Toy

question 7

Multiple Choice

The Rewehon department at Greenwich plc manufactures high quality toy cars for customers in the London area. Selected data from the budget for the 12 months ending 31st December is available:
Budget 2000
$\begin{array}{|l|c|}\hline & £ \\\hline \text { Sales (90,000 units) } & 2,700,000 \\\hline \text { Cost of goods sold (see notes 1 and 2) } & 1,800,000 \\\hline \text { Gross profit } & 900,000 \\\hline \text { Selling general \& administrative overheads (see note 3) } & 650,000 \\\hline \text { Profit betore tax } & 250,000 \\\hline\end{array}$
Note 1. Cost of goods sold includes fixed costs of £400,000
Note 2. If production is increased from 90,000 units to 100,000 units per annum it is estimated that fixed costs will increase by £20,000
Note 3. Sales commission on the existing orders is 7.5% of sales and is included in the total cost of £650,000. All other costs are assumed to be fixed.
Capacity
The current capacity at the factory is 100,000 units per year. In the budget for the year the company expect to sell 90,000 units.
New order
After agreeing the budget a company in South Africa contacted Greenwich to discuss two orders. This is an unusual situation, as the Rewehon department has never exported before.
The first order is for 10,000 units but if the selling price is reduced they will place a larger order. Rewehon have to accept only 1 order. Details of the orders are as follows: $\begin{array}{|l|l|}\hline \text { Order 1* } & \\\hline \text { Quantity } & 10,000 \text { units } \\\hline \text { Selling price } & \text { £22 per unit } \\\hline\end{array}$
*The sales commission for this order will increase to 10%. Additional variable shipping costs will be 5% of sales value and additional insurance to export the toy cars will be £3,000. (Also refer to note 2 above) $\begin{array}{|l|l|}\hline \text { Order 2* } & \\\hline \text { Quantity } & 20,000 \text { units } \\\hline \text { Selling price } & \text { £21 per unit } \\\hline\end{array}$
- **The sales commission for this order will be 10%. Additional variable shipping costs will be 5% of sales value and additional insurance costs will be £8,000. (Also refer to note 2 above) Calculate the relevant fixed costs for order 2

• A)£20,000.
• B)£1,000.
• C)£28,000.
• D)£18,000.

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Definitions:

Electroencephalography

A non-invasive method used to record the electrical activity of the brain through electrodes placed on the scalp.

CT Scan

A diagnostic medical imaging technique that uses computer-processed combinations of many X-ray measurements taken from different angles to create cross-sectional images of specific areas of a scanned object.

Magnetic Resonance Imaging

A medical imaging technique used to visualize detailed internal structures using powerful magnetic fields and radio waves; commonly known as MRI.

Electroencephalography

A non-invasive method to record electrical activity of the brain using electrodes placed along the scalp.