Question 3You are a Financial Planning and Control Manager at FreeAir Ltd, a leading manufacturer of fansused in air conditioning systems. The company is located in Liverpool, UK.In the year ended 31 March 2019, manufacturing cost per unit comprised:£Direct materialDirect labour (20 minutes per unit)Variable manufacturing overheadVariable selling expensesVariable administrative expensesFixed overheads for the year ended 31 March 2019 were:£00012515The company produced and sold 45,000 fans during the year ended 31 March 2019. The sellingprice per unit was £300.Fixed manufacturing overheadsFixed selling and distribution overheadsFixed administrative overheads2015101,6502,850930Jessica Olusange, Chief Executive, has developed a new strategy for the business. The companyhas invested in a new manufacturing facility in Leicester, UK: this investment means that fixedcosts will increase by £1,450,000 from 1 April 2019.However, the move to the new manufacturing facility means that direct labour costs are expectedto reduce by £2 per unit, variable manufacturing overheads will reduce by £0.50 per unit andvariable administrative expenses will reduce by £2 per unit. Jessica believes that her new strategywill reduce the level of financial risk to which FreeAir Ltd is exposed.From 1 April 2019, the selling price per unit of fans will be increased by 3 per cent. The companyplans to produce and sell the same quantity of fans in the year ended 31 March 2020 as it did inthe year ended 31 March 2019.The company uses a marginal costing approach to support short term planning and decisionmaking. As part of her new strategy, Jessica would like to develop a target costing approach. Sheplans to use the contribution margin ratio (also known as the profit - volume ratio) for fans for theyear ended 31 March 2019 to determine the target cost per unit for the year ended 31 March2019. (c) Critically discuss the new strategy developed by Jessica. Use the results of your calculationsin parts (a) and (b) to develop your response.

SOLUTION :- The new strategy would not be helpful at all for the company, in fact, it would even…

Answered: (c) Critically discuss the new strategy…

(c) Critically discuss the new strategy developed by Jessica. Use the results of your calculations in parts (a) and (b) to develop your response.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter2: Basic Cost Management Concepts

Section: Chapter Questions

Problem 22E: Ellerson Company provided the following information for the last calendar year: During the year,...

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