REVISION QUESTIONS

CH 2 – COST CONCEPT

Q1 XYZ company is a manufacturer of white coffee product for a local market. To

produce 1 kg white coffee production, it requires RM 5 of variable cost and RM 300
for a fixed cost per day.

(a) Write a linear equation of white coffee production

(3 marks)
(b) Calculate the manufacturing cost required to produce 1000 kg of white coffee
in one day
(4 marks)
(c) The white coffee price is RM 10 per kilogram; calculate the break-even point
of white coffee production
(4 marks)
(d) Calculate the estimate profit if the company able to produce and sell 100
kilogram white coffee per day.
(4 marks)

Q2 A manufacturing company of fishing reel decided to buy a CNC machine. Ownership

cost and maintenance cost of the CNC machine are RM 50,000 per annum and RM
5,000 per annum respectively. If the variable cost for producing one component is
RM 1.50 per unit and each component can be sold at RM 5.00 per unit;

(a) How many component per year needs to be sold by the company to achieve
break-even-point?
(5 Marks)
(b) Calculate the profit of the company for selling 25,000 units per year.
(6 Marks)

Q3 Your company is an established engineering contractor for TNB. Your job is to install
an underground cable which has two alternatives of sites, A and B. The underground
cable with estimation cost of RM 240 per meter will be installed from the TNB
Distribution Power Station to the job locations. Details of the factors for the two (2)
sites are as shown in Table Q3 below.

Table Q3: Details of the alternative sites

COST FACTOR SITE A SITE B

Average Cabling Distance 1 km 1.5 km
Monthly Rental RM3,000 RM5,000
Cost for Setting Up and Removal of RM30,000 RM20,000
Equipment
Plant Cabling Costs RM240/meter RM240/meter
Flag Person N/A RM180 per day
Authority Permit RM2,480 RM3,720
 The job requires 10,000 meters per km cabling material. Your company is given 12
weeks (6 working days per week) to complete the job. Installed cable will be paid
(selling price) RM410 per meter.

(a) List fixed and variable costs factor given in Table Q3.
(5 marks)
(b) Calculate all fixed, variable and total costs for both sites A and B.
(15 marks)
(c) Explain the site you will choose if you have limited fund to invest.
(3 marks)
(d) Calculate the length of the cables you have to install before you start making a
profit from the chosen site in (c), if total revenue (TR) is equal to total cost
(TC).
(7 marks)

Q4 Ahmad sells Satay Johor during the 15th. Convocation fiesta at UTHM. He sets up the
stall by himself, his son and one of his workers. The costs included are the rent of the
stall which cost about RM400 per day, salary of the workers, RM100 per day, and the
raw Satay which cost about 20 cents per stick.

(a) Explain the implicit cost involved in this case.

(2 marks)

(b) Identify the fixed cost and variable cost respectively.

(3 marks)

(c) If Ahmad sells Satay Johor at 40 cents per stick, how many sticks are needed
to be sold per day in order to achieve the breakeven point?
(7 marks)

(d) Calculate the selling price of Satay Johor in order to generate a profit of RM
2,000 per day if Ahmad is capable of selling about 10,000 sticks per day?
(8 marks)

Q5 You are appointed as a contractor for a Highway project. One of your tasks is to set up
the asphalt-mixing plant equipment which has a choice of three sites. Three sites
available are A, B and C. You estimate that it will cost RM 3.50 per cubic meter mile
(m3-mile) to haul the asphalt-paving material from the mixing plant to the job
location. Refer to the table below for the factors relating to these three sites.

Table Q5: Cost Factors of alpha-mixing plant equipment

Cost Factor A B C
Average hauling 8 miles 4.5 miles 2 miles
distance
Monthly rental of site RM 5,000 RM 1,0000 RM 8,000
Cost to set up & remove RM 57,000 RM 90,000 RM 73,000
Equipment
Hauling expense RM 3.50/m3-mile RM 3.50/m3-mile RM 3.50/m3-mile
Flag person Not required RM 110/day Not Required

2
 Authority Permit RM 500 RM 500 RM 1,000

The job requires 150,000 m3 of mixed-asphalt-paving material. You are given by your
client to complete the works in five months (20 weeks of 6 working days per week).
The delivered paving material is paid for RM 50 per m3.

(a) List fixed cost and variable cost from the cost factor listed in the Table Q5.
(2 marks)

(b) (i) Compute all fixed costs and variable cost for all three sites A, B and C.
(12 marks)

(ii) Identify the site you will choose.

(2 marks)

(iii) Justify why you choose the site in (b) (ii).

(3 marks)

(c) List Total Cost (TC) equation correspond to the site of A, B and C by using
linear equation y = mx + c
(3 marks)

(d) Assume that Total Revenue (TR) is equal to Total Cost (TC). Calculate how
much cubic meter you have to deliver before you start making a profit for the
site you already chose in (b) (ii).
(3 marks)

Q6 You are appointed as a contractor for a Railway project. One of your tasks is to set up
the asphalt-mixing plant equipment which has a choice of two sites. You estimate
that it will cost RM5.40 per cubic meter mile (m3-mile) to haul the asphalt-paving
material from the mixing plant to the job location. Refer to Table Q6(b) below for the
factors relating to the two sites.

Table Q6(b)

Cost factor Site A Site B

Average hauling distance 4 miles 3.3 miles
Monthly rental of site RM10,000 RM9,000
Cost to set up and remove
RM89,000 RM75,000
equipment
RM5.40/ RM5.40/
Hauling expenses
m3-mile m3-mile
Flag person RM90/day Not required

The job requires 50,000 m3 of mixed-asphalt-paving material. You are given by your
client to complete the works in five months (20 weeks of 6 working days per week).
The delivered paving material is paid for RM29 per m3.

(i) Compute all fixed costs and variable cost for the two sites.

3
 (10 marks)
(ii) Choose the best site.
(2 marks)
(iii) If Total Revenue (TR) is equal to Total Cost (TC), calculate how much cubic
meter you have to deliver before you start making a profit. Compute ONLY
the site you already choose in (ii).
(3 marks)

Q7 A manufacturing company leases a building for RM 100,000 per year for its
manufacturing facilities. In addition, the machinery in this building is being paid for
an installment of RM 20,000 per year. Labor cost and material cost for each unit
product are RM 15 and RM 10 respectively. The product can be sold for RM 40.

(i) Identify and compute the fixed costs?

(2 marks)

(ii) Identify and compute the variable costs

(2 marks)

(iii) How many units per year must be sold for the company to breakeven?
(3marks)

(iv) If the selling price is lowered to RM 35 per unit, how many units must be sold
each year for the company to earn a profit of RM 60,000 per year?
(3 marks)

Q8 Two alternative designs are under consideration for a tapered fastening pin. The
fastening pins are sold for RM0.70 each. Either design will serve equally well and
will involve the same material and manufacturing cost except for the lathe and drill
operations. Design A will require 16 hours of lathe time and 4.5 hours of drill time per
1 000 units. Design B will require 7 hours of lathe time and 12 hours of drill time per
1,000 units. The variable operating cost of the lathe, including labor, is RM18.60 per
hour. The variable operating cost of the drill, including labor, is RM16.90 per hour.
Finally, there is a sunk cost of RM5000 for Design A and RM9000 for Design B due
to obsolete tooling.

(i) Determine the total cost of Design A if 125,000 units are sold each year
(2 marks)
(ii) Determine the total cost of Design B if 125,000 units are sold each year
(2 marks)
(iii) Which design should be adopted (give your reason)?
(3 marks)
(iv) What is the annual saving over the other design?
(3 marks)
Q9 JohorBina is a contractor company specialise in bridge construction. The company
has been offered two projects to construct a bridge at two different locations.
However, based on the capability of the company, the company is only able to accept

4
 one project at a time. To make decision, cost estimation have to be made. The cost
factors relating to the two projects are shown in Table Q9(b).

Table Q9 (b)
Cost Factors Project A Project B
Concrete beams and columns needed 6 beams, 8 beams,
12 columns 16 columns
Equipment rental (per month) $1000 $2500
Site investigation $40636 $30848
Labour cost:
(i) Design engineer $150 per hour $130 per hour
(ii) Field/construction engineer $100 per hour $90 per hour

The design phase for both projects take 3 months and the construction phase take 9
months, Thus total of 12 months to complete (With 6 working days per week and 8
working hours per day). The volume for each beam and column are 500m3 and 314m3
respectively. The cost of concrete is $65 per unit volume.The revenue for the bridge
construction comes from the toll payment by the users of the bridge. The fees for each
automobile that passes through the bridge is $1.10 per automobile on everage. The
everage number of automobile passes through the bridge is 60 000 per year.

(i) Calculate the cost of material for each project.

(5 marks)

(ii) Calculate the cost of labour for each project

(5 marks)

(iii) Compute total cost for both projects

(6 marks)

(iv) Choose the best project

(1 marks)

(v) Calculate how many years the company start making a profit from the best
project you have chosen in (iv)
(4 marks)

Q10 A motorcycle component manufacturer produces parts for bike wheels. Two
processes are possible for manufacturing. Process 1 requires daily production time of
4 hours/day and production rate of 35 parts/hour. While, Process 2 requires daily
production time of 7 hours/day and production rate of 15 parts/hour. Process 1 and
Process 2 produced rejected parts of 20% and 9%, respectively. Both processes are
fully automated, and variable overhead cost is charged at the rate of RM40 per hour.
Each part is made from RM4 worth of material and good parts can be sold for RM30.

(i) Identify which process should be adopted if all good parts can be sold and
rejected parts cannot be sold.
(6 marks)

5
 (ii) Calculate the total cost if the manufacturer intended to produce 9800 units
based on the process adopted in Q1 (a).
(6 marks)

Q11 Two currently owned machines by Transformers Enterprises who is the sole agent for
lorry parts and components in Malaysia are being considered for the production of a
new part. The capital investment associated with the machines is about the same. The
important differences between the machines are their production capacities
(production rate x available production hours) and their reject rates (percentage of
parts produced that cannot be sold). Consider the following Table 1:

Table 1: Production Capacities

Machine A Machine B
Production rate 100 parts / hour 130 parts / hour
Hours available for 7 hours / day 6 hours / day
production
Percent parts rejected 3% 10%

The material cost is RM6.00 per part, and all defect-free parts produced can be sold
for RM12.00 each. (Rejected parts have negligible scrap value.) For either machine,
the operator cost is RM15.00 per hour and the variable overhead rate for traceable
costs is RM5.00 per hour.

Determine:
(i) Profit for Machine A
(4 marks)

(ii) Profit for Machine B

(4 marks)

(iii) The maximum percentage of rejected parts produced by Machine B to be as

profitable as Machine A
(6 marks)