REVIEW SESSION FOR FINAL EXAM

CVP question

Company X gave the following information to its management accounting department to make a cost profit volume analysis about the company

Sales

$46,000

Variable cost [factory]

$14,000

Fixed Cost [factory]

$5,000

Units sold

700

Production Capacity

1200 units

Selling fixed cost

$4,000

Variable cost [Selling]

$ 12000

Accrued cost

$1500

REQUIRED

1. Calculate CM per unit; CMR

2. Determine the breakeven point in units and $

3. Calculate margin of safety in $ & %.

4. The sales manager believes that the company could increase sales by 200 units if advertising is increased by $1500. Should the company increase advertising expenses?

5. Determine sales revenue in units and $ necessary to generate after-tax profit of $30,000

6. Determine the sales revenue in units and $ necessary to generate before tax profit of $28000 if tax rate is 20%

7. Calculate degree of leverage [DOL] and if sales increases by 15%, what will be the net income of this company. [use original data in the beginning]

Solution of Assignment

1. Find CM per unit and CMR

Sales = 46,000

VC = (26,000) [14,000 + 12,000]

CM = 20,000

FC = (9,000 ) [5,000+ 4,000]

NI = 11,000

CM Per Unit

Sales = $65.70 [46000 / 700]

VC = ($37.14) [26,000 / 700 ]

CM = $28.56

CMR = CM / sales = 28.56 / 65.70 =0.44

2. BE sales in Units = FC / CM per unit

Fixed Cost = $9,000

BE sales in units = 9000/ 28.56 =315 units

BE sales in $ = FC /CMR = 9000 / 0.44 = $20,455

3. Margin of safety :

MS in $ = E(sales) – BEsales = 46,000 – 20.455 = $20,409

MS in % = MS in $ / Actual Sales =20,409 / 46,000=0.44 =44%

4. Incremental CM = increase in sales x CMR

Selling price = $65.70

Increase in sales = 200 units x 65.70 = $13,140

Increase in CM in $ = Sales increase [$] x CMR

Increase in Contribution =$5,782 [ 13,140 x 0.44]

Increase in FC = ($15,00)

Increase in profit = $4,282

Accept the increase in advertising because overall profit will increase by $4,282.

5. After Tax Profit = 30,000

Target sales (AT) in units = (TP + FC)/CM PER UNIT= [30,000 +9000]/ 28.56 =1366 units

TP sales in $ [AT] in $ = [9000 +30,000 ] / 0.44 = $ 88,637

6. Target Profit = $ 28,000 AFTER tax

Before tax profit = 28000/ 1- 0.20 =$35,000

Before tax target sales in units = [FC + (TP/1-T)] /CM PER UNIT

=(35,000 + 9,000) /28.56 =1541 units

Before tax Target Sales in $ = [FC + TP ]/ CMR

= (9000 +35000) / 0.44 = $100,000

7 DOL = Degree of operating leverage

DOL = CM / profit = 20,000 / 11,000 = 1.82

If Sales increase by 15% , NI will increase by 27.3% [1.82 x 15%]

NI increase = 11,000 x 0.273 =$ 3,003

Total NI after sales increase = 11,000 +3,003 = $14,003

Question 2

IBL Ltd has identified the following overhead costs and cost drivers for next year

Overhead Items

Estimated ( cost) $

Setups cost

50,000

O

ACC 320

Question 1

CVP question

Laila company has provided the following information about the company

Sales

$225,000

Sales Discount

$20,000

Overhead cost (Fixed)

$ 35,000

Overhead (Variable)

$ 20,000

Sales Return /Allowance

$2,500

Selling commission [variable ]

$ 39,600

Supplies

$2,600

Selling commission [fixed]

$ 15,000

Prepaid expense

$11,000

Variable admin expenses

$ 24500

Accrued cost

$7900

Fixed admin expenses

$ 20,000

Tax

25%

Interest expenses

$5,420

Capacity of production

4,000 units

Units sold

3,500

Units produced

3,500

Hint : all selling and admin costs are operating expenses

REQUIRED

1. Calculate the net income using contribution approach

2. Calculate Net income using the absorption method [ Financial Accounting method]

3. Find CM per unit and the Contribution Margin Ratio

4. Determine the breakeven sales in units and dollars

5. Draw a graph to show the profit and lost and breakeven point for this company [BE graph]

6. Calculate margin of safety in dollars and in percentage . Explain what this concept means to a cost accountant.

7. The sales manager believes that a project of the company could increase sales by 25% but variable cost will also decrease by $5,000 and fixed cost will increase by $ 85,000. Should the company accept the project or reject ?

8. Determine the sales revenue necessary to generate before tax profit if the after tax is$75,000. The tax rate is 18%

9. Determine sales revenue necessary to generate after-tax profit of $85,000 .

10. Calculate degree of leverage [DOL] and if sales increases by 25%, what will be the increase or decrease in net income in $ of this company? What will be the total net income if the project is accepted

[use original data in the beginning]

QUESTION 2

ABC problem

Company LSD LTD has 4 types of overhead . The four categories and expected costs for each category for next year are listed below

Company LSD LTD

Activity cost

Setups cost

$150,000

Inspection cost

$90,000

Maintenance cost

$120,000

Material Handling cost

$ 82,000

Actual overhead Cost

$30,000

Estimates for the proposed job [Job #23] are as follows

Direct Materials

$6,000

DL (1000 hours)

$10,000

Machine Hours [maintenance cost]

500

# of material moves

12

# of setups

5

# of inspections

10

Units produced

240

The company has been asked to submit a bid for a proposed job. The plant manager thinks getting this job would result in new business in future years. Usually bids are based upon full manufacturing cost plus 30%.

In the past , full manufacturing cost has been calculated by allocating overhead using volume based cost driver [[DLH]. The plant manager has heard of a new way of applying overhead that uses cost pools and cost drivers.

Expected activity for the four activity based cost drivers th

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