Question

You are the financial manager of a small ice cream company, planning to launch a new product. This is a small chocolate-coated ice cream, containing no colouring or flavouring additives, available in a wide range of different varieties aimed at the children’s market. It will be produced as a boxed unit containing 24 ice creams.
Prepare an information paper for senior managers within the company which explains the key financial statements comprising business accounts. It should describe each type of statement, indicating the general format and its role in the process of financial management. Reference should be made to any variations that may be made for different types of organisations.
Describe the use of financial statements in the both financial accounting and management accounting, clearly distinguishing between these two functions. Indicate the significance of each function to the effective operation of a business.

You are required to carry out a costing exercise for the new ice cream product. Begin by defining the following terms, with appropriate examples related to the production of the new ice cream:
fixed cost variable cost direct cost indirect cost
Using the following information, determine what would be the minimum number of units to be made each month:
Selling price per unit £15
Variable costs per unit £10
Fixed costs per month £6,000

If the company finds that it is able to produce 2,000 units per month, what would be the new breakeven selling price? As a consequence, propose a selling price to the company directors for their next meeting, providing detailed reasons to justify your proposal.

Answer 1

Fixed cost = It represents the cost which is incurred for a period and within certain output and turnover limits tend to be unaffected by fluctuations in levels of activity

Examples : Rent , Insurance and Salary of executives

Variable cost = Those costs which vary directly with the level of output.Direct varibale costs are raw material costs, wages of those working on production line

Indirect costs =Cannot be directly attirbutable to production but they do vary with output. These include depreciation, maintance and certain labour costs

FIXED COSTS ÷ (SALES PRICE PER UNIT – VARIABLE COSTS PER UNIT)
FC =	6000
Sales price =	15
Variable costs	10
minimum number of units to be made each month:	1200	break even

if sales are of 2000, then selling price is :

FC =	6000
Sales	2000
Variable costs	10
selling price = Variable costs+FC/SALES
selling price =	13