8.

20

1 Budget appropriation 400,000

Fixed costs 150,000
Remaining budget 250,000 After fixed costs, we have a remaining budget of € 250,000
Variable cost per patient 400
Number of patients 625 Since variable costs are 400 per patient, we can treat (€ 250,000 / € 400) patients

2 New budget appropriation 360,000

Fixed costs 150,000
Remaining budget 210,000
Variable cost per patient 400
Number of patients 525 We can now treat less patients

3 New budget appropriation 360,000

Fixed costs 150,000
Remaining budget 210,000
Target number of patients 625
Target variable cost per patient 336 If we want to treat the same number of patient, we can now only spend € 336 per patient on drugs

Old spend on drugs per patient 400

New spend on drugs per patient 336
Reduction 0.16

So a 10% reduction in budget leads to a 16% reduction in spend per patient on drugs
8.25
1 Break Even Sales Revenue: If there are multiple products with different selling prices and a given sales mix
(Total Fixed Costs) / (Weighted CM% **)
** Weighted CM %: (euro total of the contribution margins of all the products) / (euro total of the sales revenues of all the products)

D E F TOTAL
Unit sales 300 400 500 1,200
Selling price per unit 80 55 70
Sales Revenues 24,000 22,000 35,000 81,000
Contribution margin percentage 70% 65% 50% Given
Contribution margin per unit 70%*80 56 65%*55 35.75 50%*70 35
Total Contribution Margin= (CM per unit)* (unit sales) 56*300 16800 35,75*400 14300 35*500 17500 48600

Weighted CM%= (Total CM)/(Total sales revenues) 48600/81000 60%

Break even Sales Revenue= (Total fixed costs) /Weighted CM ratio 31200/0,6 52,000
Alternative way to calculate the weighted CM% D E F
Contribution margin percentage 70% 65% 50% Given
Share in sales mix 300/1200 25.00% 400/1200 33.33% 500/1200 41.67%
Average Contribution margin % for sales mix 25%*70% 0.175 33,33%*65% 0.217 41,67%*50% 0.208 0.600 Weighted CM%= 60%
Break even Sales Revenue= (Total fixed costs) /Weighted CM ratio 31200/0,6 52,000
2 Salesvolume of each product with a target profit of 29.520

Weighted average CM per unit= (Total CM) / (Total sales volume) 48600/1200 40.5

Target profit 29,520 Given

Fixed costs 31,200 Given
Costs to be covered by contributions 60,720 Total
Sales Quantity required (in total) 60.720/40,5 1499 Based on: Target profit= (Sales quantity*CM per unit) -/- total fixed costs

Sales per product based on share in sales mix (300/1200)*1499 375 (400/1200)*1499 500 (500/1200)*1499 625 1,499

Extra Suppose the sales quantity of each product at break even point was asked
Target profit 0 @ Break Even
Fixed costs 31,200 Given
Costs to be covered by contributions 31,200 Total
Sales Quantity required (in total) 31200/40,5 770.37 Based on: Target profit= (Sales quantity*CM per unit) -/- total fixed costs

Sales quantity per product at Break Even based on share in sales mix (Rounded) (300/1200)*770,37 192.59 (400/1200)*770,37 256.79 (500/1200)*770,37 321 770.37
Selling price per unit 80 55 70 Given
Break even Sales Revenue at Break Even (Rounded) 15407 14123 22469 52,000
Check:
Same as answer 1
10.12
1 Drop FR implies that total fixed cost decrease by € 20.000 and everything else stay the same
Suppose drop FR:
Lost revenues of Fourbe-Riz -80,000
Savings in variable costs 48,000
Loss of Contribution Margin FR -32,000
Savings in fixed costs 20,000
Net effect would be -12,000

If the customer is dropped, total profits will drop with € 12,000 rather than increase with € 8,000 (the current loss on the customer)
This is because the contribution of the customer helps in covering fixed costs, and these fixed costs only drop with €20,000 if the customer is dropped

An alternative way is to compare the Income Statements before and after dropping the customer:
Existing (given) Drop FR customer Difference
Total Revenues 200,000 120,000 -80,000
Total Variable costs 90,000 42,000 -48,000
Total Fixed costs 100,000 80,000 -20,000
Total Operating profit 10,000 -2,000 -12,000

2 Accept the extra (identical) FR job?

Extra job FR is exactly the same as existing FR job.
Since this is a situation with limited capacity, we have to look at the contribution margin per unit of the constraint (machine hour)
HG FR (existing and extra)
Revenue 120,000 80,000
-/- Variable costs 42,000 48,000
Contribution margin 78,000 32,000
Machine hours 1,500 500
Contribution per machine hour 52 64

Since the contribution per machine hour is higher for FR, this customer should be supplied first.
The additional job for FR will take up 500 hours, so there will be only 1,000 machine hours left for HG (since capacity is 2,000)

Contribution Margin for 1,000 hours FR 64,000

Contribution Margin for 1,000 hours H 52,000
Total contribution Margin 116,000
-/- Total Fixed costs 100,000
Total New Operating profit 16,000 instead of 10.000 So higher profit

Obviously, Jours-Daim management should be very careful in not meeting the demand of HG. If the FR order is a one time order and HG is repeat business.
JD will have to consider the implications for the long-term relationship with HG
 10.17 Relevant Costs: expected future costs that differ among alternative courses of action
Costs that are relevant because the choice can be made for another alternative.
Future costs and not actual costs

1.1 Material K is in regular use. The consequence of using the materials in inventory is that the firm will have to buy more of this material for its regular use
Therefore, we need to value the use of K at the current purchase price
Current stock of 2,000 kgs of K is bought for € 19,600
Price per kg 9.8
Current price is 5% higher 10.29
Kgs K used 3,000
Relevant cost of K 30,870

Material L is in stock and has already been bought. These costs are gone and cannot be changed. However, we can get € 11 per kg if we sell it, this is the opportunity cost
Lost revenues of not selling one kg L 11
Kgs L used 200
Remark 1 Relevant cost of L 2,200

1.2 Labor is currently used to make P, and we cannot do this when we accept the contract
Each unit of P requires € 38 / € 9.50 = 4 labor hours
Each unit of P generates € 40 in contribution margin, so € 10 per labor hour
The contract requires 800 labor hours, leading to the following costs
Direct labor cost per hour 9.5
Opportunity cost per hour 10
Toal relevant costs per labor hour 19.5
Hours 800
Relevant cost of labor 15,600

2 Overhead costs are only relevant if they change because of the order, for example, if the order required additional production supervisors
Any allocated overheads are not relevant if the order is really a special one-off order

Remark 1 Relating to Material L In the exercise is given that if not used, the stock of material L would be sold for 11 per kg.
Suppose there was an addition in the exercise that the unused stock of Material L could only be sold
(for 11 per kg) if the whole unused stock of 250 kg is sold. In other words: suppose it is not possible
to sell less than 250 kg of material L, so "everything or nothing".
In that case the relevant costs for material L would have been: 2750 which is: (250*11)