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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

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

\$ 35,000

\$ 20,000

Sales Return /Allowance

\$2,500

Selling commission [variable ]

\$ 39,600

Supplies

\$2,600

Selling commission [fixed]

\$ 15,000

Prepaid expense

\$11,000

\$ 24500

Accrued cost

\$7900

\$ 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

\$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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