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ACCA Strategic Professional · Advanced Performance Management · Budgetary planning and control

Halden Co budgets for a product with a selling price of 50 per unit. Demand is uncertain. The unit variable cost is 30 and the batch must be made before demand is known. Production of 1,000 units costs 30,000 in total. The probabilities of demand are 1,000 units (0.4) and 2,000 units (0.6). Unsold units have no value. Ignoring other costs, the expected contribution if 2,000 units are made (cost 60,000) is?

The expected profit is 20,000. Making 2,000 units costs 60,000. With low demand revenue is 50,000, a loss of 10,000, and with high demand revenue is 100,000, a profit of 40,000. Weighting these by 0.4 and 0.6 gives 20,000.

  1. A16,000Correct
  2. B40,000
  3. C20,000
  4. D28,000

Explanation

Making 2,000 units costs 60,000. If demand is 1,000, revenue is 50,000 and profit is -10,000. If demand is 2,000, revenue is 100,000 and profit is 40,000. Expected value = (0.4 x -10,000) + (0.6 x 40,000) = -4,000 + 24,000 = 20,000. The 40,000 figure ignores the probability of low demand, and 16,000 arises from using revenue less cost for 1,000 units incorrectly.

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