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Worked Solutions - A2 Accounting for AQA - Cox, Fardon - Prof. Accounting

A.A.T.

Many students are asking for answers to questions from texts which do not come with any possible answer.

I am not here to do your homework for you but will provide a worked answer to the set question ad hoc.

A reply will not be instant. Try and draw from a question / answer the key accounting concepts and principles which can then be utilised in other (examination) questions.

There are two threads one for AS and one for A2. To keep the thread short with answers please only post comments if absolutely necessary.

Prof. Accounting

(edited 11 years ago)

Reply 1

A.A.T.

This is only question 2 in the chapter but I find many students find this harder than later questions. A very good concept question this is. I hope my answer is detailed enough.

The second bullet point is key. Think of opportunity cost, Do x and give up y. So bullet point 2 states if an outside supplier is used then Pentland Pumps can benefit with contribution of 75,000 (750 x (250-150)).

BUT we think of this 75,000 from a cost perspective (even though it is contribution) and would be added to option 1 (in-house manufacture) as IF option 1 is undertaken we would sacrifice this amount as it would only be earned IF option 2 (outside supplier) is undertaken which is stated in the second bullet. Again, this of opportunity cost. A term associated grately with Economics.

The marginal cost of making 3,500 pump motors per year (3,500 units at £85) £297,500 + contribution which will be lost from ‘olde worlds’ handpumps (750 units at £250 – £150) 75,000 = 372,500.

Compared with:

Buying in cost from outside supplier:

3,500 units at £95 = 332,500

Remember these two comparison values is COST so we are looking for the LOWEST to give the HIGHEST profit.

Therefore, by buying in pump motors from an outside supplier, the company has the potential to increase profits by £40,000 (£372,500 – £332,500).