ACCT1046 SOLUTIONS TO PRACTICE EXAM QUESTIONS

QUESTION ONE Glorias Gift Shop Income Statement for year ended 30 April 2013 $ Sales (150,000 2,000) Less COGS Gross profit Other income Interest income Dividend income Gross profit & other income Expenses Wages Depreciation Equipment ([23,000 3,000] / 10) Depreciation Vehicle (15% x [28,000 12,000]) General & admin. Interest Rent (40,000 + 2/3 x 4,500) Selling Phone and internet (3,500 + 500) Insurance (6/12 x 2,400) Profit 22,000 2,000 2,400 5,000 3,000 43,000 8,000 4,000 1,200

$ 148,000 (60,000) 88,000 2,500 1,700 92,200

90,600 1,600

Glorias Gift Shop Balance Sheet as at 30 April 2013 $ Current assets Cash Accounts receivable Inventory Prepaid insurance (2,400 1,200) Prepaid rent (4,500 3,000) Noncurrent assets Equipment (23,000 9,000 2,000) Vehicle (28,000 12,000 2,400) Total assets Current liabilities Accounts payable Accrued phone and internet Unearned revenue Noncurrent liabilities Loan Total liabilities Owners Equity Capital, G. Goodfellow (59,200 + 1,600) Total liabilities + Owners Equity 13,000 5,000 48,000 1,200 1,500 12,000 13,600

68,700 25,600 94,300

6,000 500 2,000 25,000

8,500 25,000 33,500 60,800 94,300

QUESTION TWO Gandalfs is a single-product manufacturing company, making garden gnomes. The following information relates to production in 2011: Selling price per Unit: Variable manufacturing costs: Annual fixed manufacturing costs: Variable marketing and admin costs: Annual fixed non-manufacturing costs: Annual volume in 2012 (a) $50 $24 per unit $500,000 $8 per unit $256,000 48,000 units

Calculate the break-even point in: (i) number of garden gnomes, and (ii) sales dollars. BE = FC / CMU = FC / (SP VCU) = ($500,000 + $256,000) / [$50 ($24 + 8)] = $756,000 / $18 = 42,000 units In sales $ 42,000 x $50 = $2,100,000

(b)

What is the margin of safety (in number of garden gnomes) at this level of production? How do you interpret this? Margin of safety = current production break-even production = 48,000 42,000 = 6,000 The margin of safety indicates how far above the break-even point the business is currently operating at. This can be interpreted as the volume of sales that the business could lose before going into a loss-making situation.

(c)

If Gandalfs wanted to earn a profit of $150,000, how many garden gnomes would have to be sold? Sales = (FC + target profit) / CMU = ($756,000 + $150,000) / $18 = $906,000 / $18 = 50,333 gnomes

(d)

Calculate the profit earned in 2012.

Profit = Total Contribution FC = (Volume x CMU) FC = (48,000 units x $18) $756,000 = $864,000 $756,000 = $108,000 Alternatively: Profit = Revenues Expenses = (48,000 x $50) ($756,000 + 48,000 x [$24 + $8]) = $2,400,000 ($756,000 + $1,536,000) = $2,400,000 $2,292,000 = $108,000

(e)

Gandalfs is considering changes in plant operations and production processes for 2013. The changes would result in a reduction in variable costs of $6 per unit, and would increase fixed manufacturing costs by $265,000. How many units (garden gnomes) would need to be sold to earn the same profit as in 2012?

Sales to earn profit of $108,000 (determined in part d above) = (FC + P) / CMU = (FC + P) / (SP VCU) = ($756,000 + $265,000 + $108,000) / ($50 [$24 + $8 - $6]) = $1,129,000 / $24 = 47,042 units (f) Would you recommend the changes described in (e) above? You must explain your answer. Yes. I would recommend these changes because Gandalfs can make the same profit by selling fewer units than in part d (Gandalf needed to sell 48,000 units). However, Gandalfs should consider the impact of increased operating leverage (increased risk, with profits being more susceptible to fluctuating sales) as a result of increased fixed costs relative to variable costs. QUESTION THREE Schedule of Cash Collections from Customers May June $14,000 $16,000 $32,000* $22,400 $68,400 $33,600 $25,600 $75,200 July $12,000 $38,400 $19,200 $69,600

From cash sales (20%) From April credit sales

From May credit sales (credit sales = 80% x $70,000) From June credit sales (credit sales = 80% x $80,000) From July credit sales (credit sales = 80% x $60,000) Total *Balance of Accounts Receivable

Collections from customers Payments to suppliers Payments of commission

Kays Kitchens - Cash Budget May $68,400 ($29,000)** ($12,000)

#

June $75,200 ($35,000) ($14,000) ($20,000) ($30,000) ($23,800) $11,400 ($12,400)

July $69,600 ($40,000) ($16,000) ($20,000) ($15,000) ($21,400) ($12,400) ($33,800)

Payments for administration expenses (excl. depn.) Repayment of loan Payment of dividend Net cash flows Opening balance Closing balance **Balance of Accounts Payable # Commissions owing at 30 April

($20,000) $7,400 $4,000 $11,400