Management accounting BJ Gears. Department A has during the ...

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Management accounting

BJ Gears.

Department A has during the last two years developed a new type of Gear named Flexgear1. The company has got a patent on the new gear in Europe. It is possible to use older gears instead of the new one but then the costumers must use more gears and more space in the machinery were the gear is used. Development cost in the past two years are 1 mio. kr.

Department A has made a lot of prototypes of the gear and the management has decided to place the production of Flexgear1 on a total new semiautomatic production facility where only one employee is needed. The new machinery will use two hours to produce one unit of Flexgear 1.

The wage for the employee is 300 kr/hour inclusive pension, social costs etc. and you can consider the wage as a variable cost because he is taken from another ongoing production and he can return to that production if the production of Flexgear 1 cannot use all his capacity (37 hour per week). Overtime will increase wage to 450 kr/hour and the maximum amount of overtime is 15 hours pr. Week.

Analysis of the market for components and metals shows that component 1 has a market price at 500 kr/component and metal type XC costs 300 kr/kg. Flexgear 1 will consume one component 1 and 1,5 kg of metal XC in the production.

The expected fixed costs for the new production are as shown in the table below:

Fixed cost per week (kr. Per week)
Machine costs (maintenance, depreciation, power etc.) 15.000
Planning and management 5.000
Insurance 1.000
Contribution to common costs 4.000

Flexgear 1 can be, as mentioned, substituted by other types of gears so there is a price limit for the new gear. Market research has resulted in the following demand in Europe :
17 gears per week at 3300 DKK.

Question 2.1
The text says that wage is a variable cost, you most argue for and against that

Question 2.2
How will you use the information about research and development costs.

The British market is not included in the market research given in the text but one of the sales managers has talked with a potential customer. The customer thinks that he will buy Flexgear 1 if the price is 2.500 DKK. per gear

Question 2.3
Will it be a profitable decision to say yes to the British customer?

Question 2.4
If you think it is a good idea to export to UK, how many can you sell ?

Question 2.5
Build a profit/loss budget for the next year for Flexgear 1. If the company sells one more markets the budget is supposed to be divided into these markets.

Question 2.6
How many Flexgear 1 do BJ Gears need to sell each year to make an operating profit of 300.000 DKK.

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Question 2.1
The text says that wage is a variable cost, you most argue for and against that

Wages has two parts. There are some wages, which are fixed and there are some parts which are variable. Hence, we should call it as a mixed cost.
Pension, Insurance are some costs, which are fixed for the month, and must be paid irrespective of the number of hours worked. Direct wages are variable costs and paid as per the number of hours worked. So this should be treated as a variable cost.
The total amount of wage 300 kr/hour, can be divided in fixed cost and variable cost, and it will give better results for decision taking by the management....

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