Solution: 2

Requirement 1:
Enter the dollar amount of each cost item under the appropriate headings. Note that each cost
item is classified in two ways: first, as variable or fixed with respect to the number of units
produced and sold; and second, as a selling and administrative cost or a product cost. (If the item
is a product cost, it should also be classified as either direct or indirect as shown.) (Leave no
cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your
response.)

Selling or
Administrat
Cost behavior ive Product Cost
Cost item Variable Fixed Cost Direct Indirect
Tk.1,18,000 Tk.1,18,000
Factory labor, direct $0 $0 $0
Advertising 0 50,000 50,000 0 0
Factory supervision 0 40,000 0 n/r 40,000
Property taxes, factory building n/r 3,500 n/r 0 3,500
Sales commissions 80,000 0 80,000 0 0
Insurance, factory 0 2,500 n/r 0 2,500
Depreciation, administrative
0 4,000 4000 0 0
office equipment
Lease cost, factory equipment 0 12,000 0 n/r 12,000
Indirect materials, factory 6,000 0 n/r 0 6,000
Depreciation, factory building n/r 10,000 n/r n/r 10,000
Administrative office supplies 3,000 0 3,000 0 0
Administrative office salaries 0 60,000 60,000 0 0
Direct materials used 94,000 0 0 94,000 0
Utilities, factory 20,000 0 0 0 20,000
Total costs 321,000 182,000 197,000 212,000 94,000

Requirement 2:
Compute the average product cost of one patio set. (Round your answer to the nearest dollar
amount. Omit the "$" sign in your response.)

Average product per patio

153
cost set

Requirement 3:
Assume that production drops to only 1,000 sets annually. Would you expect the average
product cost per set to increase, decrease, or remain unchanged?

Increase
Requirement 4:
Refer to the original data. The president's brother-in-law has considered making himself a patio
set and has priced the necessary materials at a building supply store. The brother-in-law has
asked the president if he could purchase a patio set from the Dorilane Company "at cost," and
the president agreed to let him do so.

(a)Would you expect any disagreement between the president and brother-in-law over the price?

Yes

(b)Because the company is operating at full capacity, what cost term used in the chapter might
be justification for the president to charge the full, regular price to the brother-in-law and still
be selling "at cost"?

Opportunity cost

Solution: 03

1.Old: (Contribution margin x 600,000) - $580,000 = Budgeted profit

[($3.10 - $2.10) x 600,000] - $580,000 = $20,000

New: (Contribution margin x 600,000) - $1,140,000 = Budgeted profit

[($3.10 - 1.10) x 600,000] - $1,140,000 = $60,000

2. Old: $580,000 ÷ $1.00 = 580,000 units

New: $1,140,000 ÷ $2.00 = 570,000 units

3. A fall in volume will be more devastating under the new system because the high fixed
costs will not be affected by the fall in volume:

Old: ($1.00 x 500,000) - $580,000 = -$80,000 (a $80,000 loss)

New: ($2.00 x 500,000) - $1,140,000 = -$140,000 (a $140,000 loss)

The 100,000 unit fall in volume caused a $20,000 - (- $80,000) = $100,000 decrease in
profits in the old environment and a $60,000 - ( - $140,000) = $200,000 decrease in the new
environment.

4. Changes in volume affect profits in the new environment (a high fixed cost, low variable
cost environment) more than they affect profits in the old environment. Therefore,
profits in the old environment are more stable and less risky. The higher risk new
environment promises greater rewards when conditions are favorable, but also leads to
greater losses when conditions are unfavorable, a more risky situation.
Solution:6

RC COLA COMPANY
Req-(i) CUP Income Statement (Estimated)
For the Year Ending December 31, 2017

Net sales ........................................................................... Tk- 1,800,000

Variable expenses
Cost of goods sold ....................................................... Tk-1,098,000*
Selling expenses .......................................................... 70,000
Administrative expenses ............................................. 20,000
Total variable expenses ..................................... 1,188,000
Contribution margin .............................................................. 612,000
Fixed expenses
Cost of goods sold ....................................................... 283,000
Selling expenses .......................................................... 65,000
Administrative expenses ............................................. 60,000
Total fixed expenses ......................................... 408,000
Net income ........................................................................... Tk- 204,000

*Direct materials Tk-430,000 + direct labor Tk-352,000 + variable manufacturing overhead Tk-
316,000.
(ii) Variable costs = 66% of sales (Tk-1,188,000 ÷ Tk-1,800,000) or 10.56 per bottle (Tk-
16.00 X 66%). Total fixed costs = Tk-408,000.

(1) Tk-16.00X = Tk-10.56X + Tk-408,000

Tk-5.44X = Tk-408,000
X = 75,000 units
(2) 75,000 X Tk-16 = Tk-1,200,000

(iii) Contribution margin ratio = (Tk-16.00 – Tk-10.56) ÷ Tk-16.00

= 34% (or 1 – .66)

Margin of safety ratio =(Tk-1,800,000 – Tk-1,200,000) ÷ Tk-1,800,000

= 33% (rounded)
(iv) Required sales

$408,000 + $238, 000

X= = Tk-1,900,000
.34
(v) Degree of Operating Leverage: Contribution/EBIT= 612,000/204000=3
Its Uses:

Solution:7(b)

Req:(1) Margin of Safety =Sales in Tk-BEP in Tk =1200000-900000=300000

Req:(11) Margin of Safety ratio = (Sales in Tk-BEP in Tk)*100/ Sales=(1200000-

900000)*100/1200000=25%

Solution:7(c)

Sales = No of Client* Price=570*120=Tk 68,400

Variable Cost = Sales*65%= Tk 44,460 Per unit= Variable Cost/unit=44460/570=78

Fixed Cost= Tk 21,000

Req:1) Contribution Margin Per unit=120-78=42

Contribution Margin in Tk= Sales- Variable Cost =68,400-44,460=23940

CM Ratio = Contribution Margin/ Net Sales=23940/68,400=0.35 or 35%

Req:2)

Solution:9(b)

Lease Bank loan 40000

Duration 4 Years Duration 4 Years
Annual Lease Payment 10000 Rate 10%
Salvage Value 10000
Loan Installment Calculation PV=A/i(1-
1/(1+i)^n 12619

Loan Amortization Schedule

Loan @ the Interest Principle Loan outstanding @

Year beginning Loan Installment repayment repayment the ending
1 40000 12619 4000 8619 31381
2 31381 12619 3138 9481 21900
3 21900 12619 2190 10429 11471
 4 11471 12619 1147 11471 0

Total payment=(Installment+Maintaince cost) 13619

Depreciation=(Cost-S.V)/4 7500
Calculation of present value of cash outflow

7=Col
1 2 3 4 5 6=3+4+5 6*0.40 8=2-7 9 10
Total Tax
Ye Total Inte Depreci Rep Expense Advantage NCO PV factor @
ar Payment rest ation air s s @40% after tax 6%(10*.60) PV
1 13619 4000 7500 1000 12500 5000 8619 0.9434 8131.132
2 13619 3138 7500 1000 11638 4655 8964 0.8900 7977.928
3 13619 2190 7500 1000 10690 4276 9343 0.8396 7844.563
4 13619 1147 7500 1000 9647 3539 10080 0.7921 7984.304
S.V -10000 0.7921 -7920.94
PV of cash
outflow 24016.99

Under Lease financing

1 2 3 4 5 6=3+4+5

Annual PV
Annual Lease Annuity
Lease payment factor
Year payment Tax @40% after tax @6% PV
0 10000 10000 1.0000 10000
3-Jan 10000 4000 6000 2.673 16038
4 4000 -4000 0.7921 -3168.4
22869.6
Net Adv. Of leasing 24016.99 22869.6 1147.39

Decision: The company should go for lease financing.