S5 BAFS Paper: Cost Accounting And Short-term Decisions (100 Marks)

S5 BAFS Paper: Cost Accounting and Short-term Decisions (100 marks)

2026-11-11

S5 BAFS – cost accounting and decisions

S5 BAFS paper: break-even, margin of safety, high-low costing, marginal and absorption costing, special orders, product mix and make-or-buy decisions, with answers.

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Paper details　S5 BAFS practice paper with six questions on contribution and break-even analysis, margin of safety, target profit, the high-low method of cost estimation, marginal and absorption costing, relevant costs for a special order, product mix with a limiting factor, and make-or-buy and shutdown decisions, with full answers and marking notes.

Part 1: Contribution and break-even analysis (20 marks)

A company makes and sells a single product at $80 per unit. Unit variable cost is $48 and monthly fixed costs are $240,000. Show your working in all parts and give whole numbers.

#	Question	Answer and marking notes
1	Find the unit contribution and the contribution-to-sales ratio.	Answer: Unit contribution = 80 – 48 = $32. The contribution-to-sales ratio = 32 / 80 = 40%. (Marking: 3 marks for the unit contribution, 2 marks for the ratio.)
2	Find the monthly break-even sales volume and the break-even sales revenue.	Answer: Break-even volume = 240,000 / 32 = 7,500 units. Break-even revenue = 7,500 x 80 = $600,000. (Marking: 3 marks for the volume, 2 marks for the revenue.)
3	If 9,000 units are sold in a month, find the profit and the margin of safety in units, in dollars and as a percentage.	Answer: Profit = 9,000 x 32 – 240,000 = $48,000. Margin of safety = 9,000 – 7,500 = 1,500 units, that is $120,000, or 16.67% of sales of $720,000. (Marking: 2 marks for the profit, 2 marks for the units and dollars, 1 mark for the percentage.)
4	The company wants a monthly target profit of $80,000. Find the sales volume required.	Answer: Required volume = (240,000 + 80,000) / 32 = 320,000 / 32 = 10,000 units. (Marking: 2 marks for the formula, 1 mark for fixed costs plus target profit, 2 marks for the answer.)

Part 2: High-low method and cost estimation (16 marks)

The following data cover six months of activity: the highest activity level is 8,000 units at a total cost of $424,000, and the lowest is 5,000 units at a total cost of $316,000. Cost is linear within the relevant range.

#	Question	Answer and marking notes
5	Use the high-low method to find the variable cost per unit.	Answer: Variable cost per unit = (424,000 – 316,000) / (8,000 – 5,000) = 108,000 / 3,000 = $36. (Marking: 2 marks for the cost difference, 1 mark for the volume difference, 2 marks for the answer.)
6	Find the monthly fixed cost.	Answer: Fixed cost = 316,000 – 5,000 x 36 = 316,000 – 180,000 = $136,000. (Marking: 2 marks for the substitution, 2 marks for the answer.)
7	Estimate the total cost at an activity level of 6,500 units.	Answer: Total cost = 136,000 + 6,500 x 36 = 136,000 + 234,000 = $370,000. (Marking: 2 marks for the variable element, 2 marks for the total.)
8	State one limitation of the high-low method.	Answer: It uses only the highest and lowest points and ignores the other observations, so unusual costs at those two points, or points outside the relevant range, can distort the estimate. (Marking: 2 marks for identifying the two-point basis, 1 mark for the consequence.)

Part 3: Marginal costing and absorption costing (18 marks)

A company produced 10,000 units and sold 8,000 units this period, with no opening stock. The selling price is $70 per unit, unit variable production cost is $30, fixed production overhead is $100,000, unit variable selling cost is $4 and fixed selling costs are $50,000.

#	Question	Answer and marking notes
9	Calculate the profit for the period under marginal costing.	Answer: Unit contribution = 70 – 30 – 4 = $36, total contribution = 8,000 x 36 = $288,000. Deduct fixed costs of $150,000 (100,000 + 50,000) to give a profit of $138,000. (Marking: 1 mark for unit contribution, 2 marks for total contribution, 1 mark for the fixed costs, 1 mark for the profit.)
10	Calculate the profit under absorption costing, absorbing fixed production overhead on a normal volume of 10,000 units.	Answer: Absorption rate = 100,000 / 10,000 = $10, so unit production cost is $40. Cost of sales = 8,000 x 40 = $320,000 and gross profit = 560,000 – 320,000 = $240,000. Deduct selling costs of $82,000 (32,000 + 50,000) to give a profit of $158,000. (Marking: 1 mark for the rate, 2 marks for cost of sales, 1 mark for gross profit, 1 mark for the profit.)
11	Explain the reason for the difference in profit between the two methods.	Answer: The difference is 158,000 – 138,000 = $20,000, which equals closing stock of 2,000 units x the $10 absorption rate. Absorption costing carries part of the fixed production overhead in stock to the next period, so this period profit is higher. (Marking: 2 marks for the amount, 2 marks for the stock explanation.)
12	If sales exceeded production this period, how would the profits of the two methods compare?	Answer: Sales above production means stock falls, so absorption costing releases fixed production overhead deferred from the previous period and reports a lower profit than marginal costing. (Marking: 2 marks for the stock decrease, 2 marks for the direction.)

Part 4: Special orders and relevant costs (16 marks)

The normal selling price is $80 per unit, unit variable cost is $48, monthly fixed costs are $240,000, capacity is 11,000 units a month and normal sales are 8,000 units. A customer offers a one-off order of 2,000 units at $55 each, which would need extra fixed costs of $10,000.

#	Question	Answer and marking notes
13	Find the incremental revenue from the order.	Answer: Incremental revenue = 2,000 x 55 = $110,000. (Marking: 3 marks in total for the volume, the price and the answer.)
14	Find the incremental cost of the order, including the extra fixed costs.	Answer: Incremental cost = 2,000 x 48 + 10,000 = 96,000 + 10,000 = $106,000. The existing fixed costs of $240,000 are unavoidable and therefore irrelevant. (Marking: 2 marks for variable cost, 1 mark for adding the extra fixed costs.)
15	Assuming spare capacity exists, decide whether to accept the order and calculate its effect on profit.	Answer: Incremental profit = 110,000 – 106,000 = $4,000, that is contribution of $7 per unit (55 – 48) x 2,000 = $14,000 less extra fixed costs of $10,000. With spare capacity, normal sales are unaffected, so accept the order and profit rises by $4,000. (Marking: 2 marks for the calculation, 2 marks for the decision, 1 mark for the reason.)
16	If there were no spare capacity and 2,000 units of normal sales had to be given up, decide again.	Answer: Contribution forgone on normal sales = 2,000 x 32 = $64,000, while the order adds only $4,000, so the net effect is 4,000 – 64,000 = -$60,000. Profit would fall by $60,000, so reject the order. (Marking: 2 marks for the opportunity cost, 2 marks for the net effect, 1 mark for the decision.)

Part 5: Limiting factors and product mix (16 marks)

A company makes two products on the same machine. Product X has a unit contribution of $32 and needs 2 machine hours per unit, with monthly demand of 3,000 units. Product Y has a unit contribution of $45 and needs 5 machine hours per unit, with monthly demand of 1,600 units. Machine hours available are 11,000 a month.

#	Question	Answer and marking notes
17	Find the contribution per machine hour for X and for Y.	Answer: X = 32 / 2 = $16 per hour and Y = 45 / 5 = $9 per hour. (Marking: 2 marks for X, 2 marks for Y.)
18	Rank the products for production and explain the ranking.	Answer: X earns $16 per machine hour against $9 for Y, so make X first and then Y. Machine hours are the limiting factor, so ranking is by contribution per machine hour, not per unit. (Marking: 2 marks for the ranking, 2 marks for the explanation.)
19	Find the optimal production plan and the total monthly contribution.	Answer: 3,000 units of X use 6,000 hours, leaving 5,000 hours for 1,000 units of Y. Total contribution = 3,000 x 32 + 1,000 x 45 = 96,000 + 45,000 = $141,000. (Marking: 1 mark for X hours, 2 marks for Y output, 1 mark for the total.)
20	If Y were satisfied in full first, what would total contribution be and how far short of the optimal plan would it fall?	Answer: 1,600 units of Y use 8,000 hours, leaving 3,000 hours for 1,500 units of X. Total contribution = 1,600 x 45 + 1,500 x 32 = 72,000 + 48,000 = $120,000, which is 141,000 – 120,000 = $21,000 below the optimal plan. (Marking: 2 marks for X output, 1 mark for the total, 1 mark for the shortfall.)

Part 6: Make or buy and shutdown decisions (14 marks)

The company needs 5,000 components a year. Making them costs $42 each in variable cost plus avoidable fixed costs of $60,000; an unavoidable $35,000 of fixed cost is apportioned to the component. The bought-in price is $55 each. The company currently makes and sells 7,000 units a month with contribution of $224,000 and fixed costs of $240,000.

#	Question	Answer and marking notes
21	Find the relevant cost of making 5,000 units.	Answer: Relevant make cost = 5,000 x 42 + 60,000 = 210,000 + 60,000 = $270,000. The unavoidable $35,000 is irrelevant. (Marking: 1 mark each for variable cost, avoidable fixed cost and excluding the unavoidable cost.)
22	Compare the bought-in cost and make a recommendation.	Answer: Buy cost = 5,000 x 55 = $275,000, so making saves 275,000 – 270,000 = $5,000 and the company should keep making the component. (Marking: 1 mark for the buy cost, 2 marks for the saving, 1 mark for the recommendation.)
23	At the current volume of 7,000 units, calculate the profit or loss from continuing operations.	Answer: Profit = 224,000 – 240,000 = -$16,000, that is a loss of $16,000. (Marking: 1 mark for contribution, 2 marks for the loss.)
24	Assuming all fixed costs continue if production stops, decide whether to shut down in the short run and explain.	Answer: Shutting down would mean a loss of $240,000, whereas continuing loses only $16,000, because contribution of $224,000 covers most fixed costs. Continue in the short run, though the long-run position needs another solution if price and costs stay unchanged. (Marking: 1 mark for the shutdown loss, 2 marks for the comparison, 1 mark for the conclusion.)

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