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Alpha University College

Project Cost Accounting


Group Assignment 1 (10marks)
Submission date: 23 April 2016
1. Kapla Inc.produces a single product. Sales have been very erratic, with some months
showing a profit and some months showing a loss. The companys income statement for
the most recent month is given below:
Sales (20,000 units)
Variable expenses
Contribution margin
Fixed expenses
Net loss

Br. 100,000
60,000
Br. 40,000
50,000
Br. (10,000)

The following situations refer to the preceding data and are independent unless otherwise told to
the contrary. Ignore income taxes.
Instructions:
a. Compute the companys breakeven point (BEP) in units and in total sales birr. (1 pt)
b. If the variable expenses per unit increase as a percentage of the selling price, will it result in a
higher or a lower break-even point? Why? Assume the fixed expenses remain unchanged. (1
pt)

An increase in the variable expenses as a percentage of the


selling
price would result in a higher break-even point. The reason is
that
if variable expenses increase as a percentage of sales, then the
contribution margin will decrease as a percentage of sales. A
lower
CM ratio would mean that more lanterns would have to be sold

to
generate enough contribution margin to cover the fixed costs.
c. If the sales managers receives a bonus of Br. 1.00 for each unit sold in excess of the BEP,
how many units must be sold each month to earn a return of 25% on the monthly investment
in fixed costs? (1 pt)
d. The president is convinced that a 5% reduction in the selling price, combined with an
increase of Br. 15,000 in the monthly advertising budget, will cause unit sales to double.
What will be the new income if the changes are adopted?
e. Refer to the original data. The president feels that it would be unwise to change the selling
price. Instead, he wants to increase the sales commission by Br. 0.50 per unit. He thinks that
this action, combined with some increase in advertising, would cause annual sale to double.
By how much could advertising be increased to earn a monthly Br. 6,000 net income?
f. Refer to the original data. By automating certain operations, the company could reduce its
variable expenses in half. However, fixed costs would increase by Br. 20,000 per month.
i.

Compute the new contribution margin ratio and the new break-even point in units and
birrs.

ii.

Assume that the company expects to sell 25,000 units next month, would you
recommend that the company automate its operation? Explain

2. The Dashen Company has two product lines, A and B, with a contribution margin of Br. 50
and Br. 20, respectively. The president foresees sales of 20,000 units in the coming year,
consisting of 4,000 units of A and 16,000 units of B. The companys annual fixed costs are
estimated to be Br. 260,000. The variable cost as a percentage of selling prices is expected to be
50% for A and 75% for B.
Instructions:
a. Assuming the above sales mix, determine the companys breakeven point in units and in
sales birr. How many units of each product should be sold to break-even?
b. If the sales mix is maintained, what is the total contribution margin when the expected
20,000 units are sold? What is the companys operating income?

c. What volume of sales in birr for each product must DASHEN Company make to earn an
after tax net income of Br. 273,000 in the coming year? Assume the company is subject a
30% income tax rate.