Case study – John Smith

John Smith has taken early retirement at the age of 50 to develop his hobby of model ship-building into a full-time business. He has several models already assembled and has advertised in the model builders weekly journal. Interested enquiries are starting to come in and he realises that he does not know what price to charge for the models.

Advise John Smith on the following:
John Smith needs to make a decision about pricing policy. This will involve many factors such as …………….

After he has decided on a pricing policy, he will need to measure its success by making judgements on …………………….
2. For the relevant cost data in items (1) – (7), indicate which of the following is the best classification, giving reasons for your decision:
(a) sunk cost (d) fixed cost (g) controllable cost
(b) incremental cost (e) semi-variable cost (h) non-controllable cost
(c) variable cost (f) semi-fixed cost (i) opportunity cost

(1) A company is considering selling an old machine. The machine has a book value of £20,000. In evaluating the decision to sell the machine, the £20,000 is a ……

(2) As an alternative to the old machine, the company can rent a new one. It will cost £3,000 a year. In analysing the cost-volume behaviour the rental is a ……..

(3) To run the firm’s machines, here are two alternative courses of action. One is to pay the operator a base salary plus a small amount per unit produced. This makes the total cost of the operators a …….

(4) As an alternative, the firm can pay the operators a flat salary. It would then use one machine when volume is low, two when it expands, and three during peak periods. This means that the total operator cost would now be a ……..

(5) The machine mentioned in (1) could be sold for £8,000. If the firm considers retaining and using it, the £8,000 is a ………..

(6) If the firm wishes to use the machine any longer, it must be repaired. For the decision to retain the machine, the repair cost is a ………..

(7) The machine is charged to the foreman of each department at a rate of £3,000 a year. In evaluating the foreman, the charge is a ………….
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