What are the relevant costs involved, Operation Management

Process Solutions provides a computer-based document processing service. The accountant has produced the following analysis.





Sales quantity




Selling price




Sales revenue




Labour hours




Labour cost @ £20/hour








Contribution per unit sold




The Sales Manager, whose team is paid a commission on sales revenue prefers to sell the higher priced Advanced service. This is also the preferred service for the Accountant, although not for the same reason, as her argument is that the Advanced service is better because of the higher contribution per unit sold. The Operations Manager argues that the Advanced Service consumes more labour hours than the Standard or Modified services and as labour availability limits his ability to process work, this should also be taken into account. The Operations Manager prefers the Standard or Modified service as this provides greater ability to use his capacity more flexibly.

The General Manager has asked for your advice in relation to this disagreement within the management team.

11.2   Cowboy Constructions employs a full-time driver and incurs costs for a vehicle to deliver paperwork between each of their building sites. Select Couriers has offered to carry out the work to the same standard of service for a fixed sum of £2,000 per month. Cowboy's annual costs are currently:

Salary and oncosts of driver                      £16,000

Salary and oncosts of builder who

covers for sickness and annual leave

absences of driver                           £2,800

Depreciation of vehicle                     £2,500

Road tax, insurance & servicing         £1,000

Fuel                                               £3,000

Total                                             £25,300

If Cowboy uses Select Couriers, it will sell the vehicle for £2,000, and the driver's employment will be terminated without any redundancy payment. The builder who covers for sickness and leave of the driver is currently replaced by casual labour which costs £3,500.

What are the relevant costs involved in this decision? Should Cowboy sub-contract its delivery requirements to Select? What considerations are there in making this decision?

11.3  A spare parts supplier is thinking of building a car from the parts he has in his yard. He does not expect any reward for his labour but wants to know what costs he should include for the materials. He has provided the following information:

  • A chassis was bought for £100 and has no scrap value.
  • A reconditioned engine will cost £375. However, an old engine was bought for £50. It can either be sold in its present condition for £225 or additional parts costing £250 could be bought to bring to bring the engine to an equivalent standard to the reconditioned one.
  • Tyres costing £180 need to be purchased.
  • Paint is in stock at a cost of £60 but it will need to be replaced at its current price of £70.

11.4  Maximus Company has met all production requirements for the current month and has an opportunity to produce additional units of product with its excess capacity. Unit selling prices and unit costs for three models of one of its product lines are as follows.


Plain model

Regular model

Super model

Selling price




Direct material




Direct labour (@ £5 per hour)




Variable overhead




Fixed overhead




Variable overhead is applied on the basis of direct labour dollars, while fixed overhead is applied on the basis of machine hours. There is sufficient demand for the additional production of any model of the product line.

a.  If Maximus Company has excess machine capacity and can add more labour as needed (i.e. neither machine capacity nor labour is a constraint), which product is the most attractive to produce? Provide calculations and reasons to support your answer.

b. If Maximus Company has excess machine capacity but a limited amount of labour time available, to which product or products should the excess production capacity be devoted? Provide calculations and reasons to support your answer.               

Posted Date: 2/20/2013 5:35:25 AM | Location : United States

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