SECTION A

This section is compulsory.

Read the Case Study on “More Cherubs Limited” and download the excel spreadsheet

prior to completing the question in this section.

Case Study: More Cherubs Limited

More Cherubs Ltd is a manufacturer of ladies’ classic and basic styles of outerwear clothing. It provides a manufacturing service to a number of High Street retailers. More Cherubs Ltd   has established good working relationships with a number of retailers and is known for         quality and dependability, i.e., on time delivery.

More Cherubs Ltd attracts high volume orders which are typically of a repetitive nature with only occasional small changes to the styles; thus, disruption to the machine layout of factory and production runs is minimised.

There are periods in the business operating year which are traditionally quiet and during these, the manufacturer will consider smaller orders from new customers.  More Cherubs Ltd takes   on such orders to fill the spare capacity and to build or test out new working relationships.

Scenario 1. Recently, More Cherubs Ltd received an order for 5,000 Ladies Coats. The retailer is prepared to pay £40 for each coat, making the order worth £200,000 in total.

The variable costs of making one coat are £15.00; fixed costs for the relevant period are £50,000

Scenario 2. More Cherubs Ltd has received an enquiry from a new customer: an order         comprising three styles with a deadline of six weeks. The following table shows the relevant costs and selling prices for the period and the order received; relevant fixed costs for the       period and order are estimated at £50,000.

Scenario 3. Based on the above order (Scenario 2), the management of More Cherubs Ltd is wondering whether it should decline the order and offer only one or two of the products A, B or C to maximise its income from available capacity.

1.      Costing

(a)     Scenario 1. Using a tabular approach, establish the break-even point (BEP) for

this product for More Cherubs Ltd; and thus explain whether it is worthwhile

accepting this order. (Complete Table 1 in the excel workbook.)            (marks 30)

(b)     Scenario 2. Prepare a marginal cost statement for the enquiry from the new

customer. (Complete the relevant row of Table 2 in the excel workbook.)

(marks 20)

(c)     Scenario 2. Calculate the BEP for each style individually, i.e., assume that A is      the only style produced and calculate the BEP, then assume that B is the only style produced and calculate the BEP, then finally, assume that C is the only style          produced and calculate the BEP. Express the BEP in each case as sales (£ income) and number of units (output) (Complete the relevant row of Table 2 in the excel    workbook.)                                                                                                (marks 20)

(d)     Scenario 3. Should More Cherubs Ltd accept the new order for all three styles?      Give reasons for your answer by briefly discussing the relative contributions of     styles A, B and C, individual BEP (sales and output) and alternatives to accepting the order.                                                                                                   (marks 30)