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Ahsanullah University of Science and Technology School of Business BBA586 Managerial Accounting

Assignment 1
Question 1 Stratford Company distributes a lightweight lawn chair that sells for $20 per unit. Variable costs are $11 per unit, and fixed costs total $189,000 annually. Tax rate is 30%. Required: a. b. c. What is the companys breakeven quantity? Use the CM ratio to determine the break-even point in sales dollars The company estimates that sales will increase by $50,000 during the coming year due to increased demand. By how much should net operating income increase? Assume that the operating results for last year were as follows: Sales Less variable expenses Contribution margin Less fixed expenses Net operating income $ 480,000 264,000 216,000 189,000 27,000

d.

i. Compute the degree of operating leverage at the current level of sales. ii. The president expects sales to increase by 15% next year. By how much should net income increase? iii. Compute the margin of safety in units. iv. Compute the quantity to be sold to earn after tax profit of Tk. 36,000. e. Refer to the original data. Assume that the company sold 28,000 units last year. The President of the company is convinced that a $2 sales commission combined with an increase in advertising expenses will double the units sold. How much advertising expenses could be increased to maintain the profit of the last year? Refer to the original data. Assume that the company sold 28,000 units last year. The sales manager is convinced that a 10% reduction in the selling price, combined with a Tk.70,000 increase in advertising expenditures, would cause annual sales in units to increase by 60%. Would the company accept the sales managers suggestion?

e.

Question 2 Lewis Auto Company manufactures a part for use in its production of automobiles. When 10,000 items are produced, the costs per unit are: Direct materials Direct manufacturing labor Variable manufacturing overhead Fixed manufacturing overhead Total $ 12 60 24 32 $128

Monty Company has offered to sell Lewis Auto Company 10,000 units of the part for $120 per unit. The plant facilities could be used to manufacture another part at a savings of $180,000 if Lewis Auto accepts the supplier's offer. In addition, $20 per unit of fixed manufacturing overhead on the original part would be eliminated. Required: Which alternative is best for Lewis Auto Company? Question 3 Collins has been manufacturing parts for its main product. The company is currently operating at full capacity and its variable manufacturing overhead is charged to production at the rate of 40% of direct labour costs. The direct materials and direct labour costs per unit to make the parts are Tk. 12 and Tk. 15, respectively. Normal production is 20,000 parts per year. A supplier offers to make the wheels at a price of Tk. 36 each. If Collins accepts this offer, all variable manufacturing costs will be eliminated, but the Tk. 120,000 fixed manufacturing overhead currently being charged to produce the parts will have to be absorbed by other products. Required: Should Collins buy the wheels from the outside supplier? Justify your answer. Question 4 Sugar Cane Company processes sugar beets into three products. During April, the joint costs of processing were $120,000. Production and sales value information for the month were as follows: Product Sugar Sugar Syrup Fructose Syrup Units Produced 6,000 4,000 2,000 Sales Value at Splitoff Point $40,000 35,000 25,000 Separable costs $12,000 32,000 16,000

Determine the amount of joint cost allocated to each product if the sales value at splitoff method is used. Question 5 Favata Corporation processes a single material into three separate products A, B, and C . During September, the joint costs of processing were $600,000. Production and sales value information for the month were as follows: Final Sales Separable Costs Value per Unit A 20,000 $25 $250,000 B 30,000 30 500,000 C 25,000 24 250,000 Determine the amount of joint cost allocated to each product if NRV method is used. Product Units Produced Question 6 Lakeland Manufacturing uses 10 units of part KJ37 each month in the production of radar equipment. The cost of manufacturing one unit of KJ37 is as follows: Direct material Material handling (20% of direct material cost) Direct labour Manufacturing overhead (150% of direct labour) Total manufacturing cost $1 000 200 8 000 12 000 $21,200

Material handling represents the direct variable costs of the Receiving Department, which are applied to direct material and purchased components at 20 per cent of the cost of the direct material or components delivered. This is a separate charge in addition to manufacturing overhead. Lakeland's annual manufacturing overhead budget is one-third variable and twothirds fixed. Scott Supply, one of Lakeland's reliable vendors, has offered to supply part KJ37 at a unit price of $15000. Required: 1. If Lakeland purchases the KJ37 from Scott, the capacity that Lakeland used to manufacture these parts would be idle. If Lakeland decides to purchase the part from Scott, by what amount would the unit cost of KJ37 increase or decrease? 2. Assume Lakeland is able to rent out all of its idle capacity for $25000 per month. If Lakeland decides to purchase the 10 units from Scott Supply, by how much would Lakeland's monthly cost for KJ37 increase or decrease? 3. Assume that Lakeland does not wish to commit to a rental agreement but could use its idle capacity to manufacture another product that would contribute $52000 per month. If Lakeland elects to manufacture KJ37 in order to maintain quality control, what is Lakeland's opportunity cost from using the space to manufacture part KJ37?

Question 7 Sommers Ltd, located in southern Queensland, manufactures a variety of industrial valves and pipe fittings that are sold to customers in the eastern states. Currently, the company is operating at about 70 per cent of capacity and is earning a satisfactory return on investment. Management have been approached by Glasgow Industries Ltd of Scotland with an offer to buy 120000 units of a pressure valve. Glasgow Industries manufactures a valve that is almost identical tc the pressure valve produced by Sommers; however, a fire in Glasgow Industries' valve plant has shut down its manufacturing operations. Glasgow needs the 120 000 valves over the next four months to meet commitments to its regular customers. Glasgow is prepared to pay $19 each for the valves. The cost of the pressure valve produced by Sommers, which is based on current attainable standards, is $20, calculated as follows: Direct material Direct labour Manufacturing overhead Product cost $5.00 6.00 9.00 $20.00

Manufacturing overhead is applied to production at the rate of $18 per standard direct labour hour. This overhead rate is made up of the following components: Variable manufacturing overhead Fixed manufacturing overhead (traceable) Fixed manufacturing overhead (allocated) Applied manufacturing overhead rate $6.00 8.00 4.00 $18.00

Additional costs incurred in connection with sales of the pressure valve include sales commissions of 5 per cent of sales, and freight expense of $1 per unit. However, the company does not pay sales commissions on special orders that come directly to management. In determining selling prices, Sommers adds a 40 per cent mark-up to total product cost. This provides a $28 suggested selling price for the pressure valve. The Marketing Department, however, has set the current selling price at $27 in order to maintain market share. Production management believe that they can handle the Glasgow Industries order without disrupting the department's scheduled production. The order would, however, require additional fixed factory overhead of $12000 per month in the form of supervision and clerical costs. If management accept the order, 30000 pressure valves will be manufactured and shipped to Glasgow Industries each month for the next four months. Glasgow's management have agreed to pay the shipping charges for the valve. Required: 1. Determine how many direct labour hours would be required each month to fill the Glasgow Industries order. 2. Prepare an analysis showing the impact of accepting the Glasgow Industries order. 3. Calculate the minimum unit price that management at Sommers could accept for the Glasgow Industries order without reducing net profit. 4. Identify the factors, other than price, that Sommers Ltd should consider before accepting the Glasgow Industries order.