# The Islay Whisky Company Ltd

Topics: Variable cost, Costs, Marginal cost Pages: 6 (531 words) Published: May 8, 2014
I)
The Islay Whisky Company Ltd
Marginal Cost Statement for 1 unit
Type of whisky
Basic reserve
Original reserve
Special reserve

£
£
£
Revenue
6.95
14.95
23.95

Variable Cost

Direct materials
1.80
3.95
5.40
Direct labour
3.60
3.65
7.75
Direct expenses
0.80
1.25
1.75

6.20
8.85
14.90

Contribution
0.75
6.10
9.05
Diagram.1
II)
The Islay Whisky Company Ltd
Marginal Cost Statement for units
Type of whisky
Basic reserve
Original reserve
Special reserve

£
£
£
Predicted sales
80000
60000
25000
Revenue
556000
897000
598750

Variable Cost

Direct materials
144000
237000
135000
Direct labour
288000
219000
193750
Direct expenses
64000
75000
43750

496000
531000
372500

Contribution
60000
366000
226250
Diagram.2
III)
a) Contribution per £1 direct labour

Basic reserve
Original reserve
Special reserve

£
£
£
Contribution
Direct labour
0.2083
1.6712
1.6759
Ranking
3rd
2nd
1st
Diagram.3
Therefore, if direct labours are a limiting factor, maximise production of Special reserve, followed by Original reserve; reduce production of Basic reserve. b) Contribution per £1 direct materials

Basic reserve
Original reserve
Special reserve

£
£
£
Contribution
Direct materials
0.4166
1.5443
1.676
Ranking
3rd
2nd
1st
Diagram.4
Therefore, if direct materials are a limiting factor, maximise production of Special reserve, followed by Original reserve; reduce production of Basic reserve.

c) Contribution per £1 direct expenses

Basic reserve
Original reserve
Special reserve

£
£
£
Contribution
Direct expenses
0.9375
4.880
5.1714
Ranking
3rd
2nd
1st
Diagram.5
Therefore, if direct expenses are a limiting factor, maximise production of Special reserve, followed by Original reserve; reduce production of Basic reserve. IV)
136000 ÷ (6+3+1)=136000 ÷ 10=13600
Before ceasing:
Type of whisky
Basic
reserve
Original reserve
Special reserve
Total
Contribution
60000
366000
226250

Fixed Costs
81600
40800
13600

Profit/ Loss
(21600)
325200
212650
516250
Diagram.6

After ceasing:
Type of whisky
Basic
reserve
Original reserve
Special reserve
Total
Contribution
60000
366000
226250

Fixed Costs
81600
40800
13600

Profit/ Loss
(81600)
325200
212650
456250
Diagram.7
Compare with diagram 6 and 7, the profits are £516250 before ceasing Basic reserve whisky. However, the profits reduce to 456250 when managing director stop production. So my suggestion is continuing production of Basic reserve whisky. V)

i) Variable cost: Direct cost is included in variable cost, such as direct materials, direct labour and direct expenses. So it is an item of expenditure that would changes directly with variable volume. ii) Fixed cost: Indirect cost is included in fixed cost, such as insurance, rents and depreciation. This is also an item of expenditure. It is totally different with variable cost. Fixed cost maintains constant whatever changing sales and production. iii) Contribution: An organisation made the additional profit in excess of breakeven point production. And the contribution per unit is different between the selling price and its marginal cost. Because of the supposition that is unchanging between sales value and marginal cost. iv) Breakeven point: This is a point that shows outputs when total revenue is equal to total costs. The business makes neither a profit nor a loss. If the company want to make a profit, it needs total revenue to exceed breakeven point. On the contrary, the company will lose money. It is represented by unit that calls breakeven point of volume. Also it is showed by value that calls breakeven point of value. v) Limiting factor: The business is restricted by one or more factors. That can affect increasing development of performance and profitability. Some limiting factors include lacking of materials or...