REVIEW SESSION FOR FINAL EXAM
Company X gave the following information to its management accounting department to make a cost profit volume analysis about the company
Variable cost [factory]
Fixed Cost [factory]
Selling fixed cost
Variable cost [Selling]
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
IBL Ltd has identified the following overhead costs and cost drivers for next year
Estimated ( cost) $
Laila company has provided the following information about the company
Overhead cost (Fixed)
Sales Return /Allowance
Selling commission [variable ]
Selling commission [fixed]
Variable admin expenses
Fixed admin expenses
Capacity of production
Hint : all selling and admin costs are operating expenses
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]
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
Material Handling cost
Actual overhead Cost
Estimates for the proposed job [Job #23] are as follows
DL (1000 hours)
Machine Hours [maintenance cost]
# of material moves
# of setups
# of inspections
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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