Академический Документы
Профессиональный Документы
Культура Документы
From 2015 onwards, Beauty Sports Company will produce and sell dancer kits only. Improvements will be
made to the dancer kits and it is estimated that the unit variable cost will increase by $75 while the projected
sales quantity is 6,250 with no change in the selling price. The annual total fixed cost will be reduced by
$160,000.
REQUIRED:
(b) Calculate the margin of safety in sales dollars for Beauty Sports Company in 2015.
$
Manufacturing costs:
Direct materials 480 000
Direct labour 320 000
Production overheads 1 000 000
Non-manufacturing costs:
Selling expenses 900 000
Administrative expenses 528 500
Additional information:
(i) 20% of the production overheads are variable costs.
(ii) Two-thirds of the selling expenses are fixed while the remaining balance is the sales commission, which varies
with the number of units sold.
(iii) Administrative expenses are all fixed.
REQUIRED:
(a) Calculate
(1) the total fixed costs of 80 000 units of DC; and
(2) the total variable costs of 80 000 units of DC.
At a regular meeting of the company, the sales manager reports that one of its competitors is going to launch a product
similar to DC. As a result, he expects that the sales volume of DC will drop to 48 000 units in 2013 if its selling price is
maintained at $49.5 per unit. The management prefers not to have any price deduction in the local market, and is
considering adopting one of following alternatives in 2013 to solve the problem:
Alternative A
The company pays an additional sales commission of 10% on the selling price, and increases advertising expenses by
$52 500 per annum. By doing so, the expected sales volume of DC is 76 000 units.
Alternative B
The company produces and sells 48 000 units in the local market, and uses its excess capacity to accept an offer from a
mail-order house to sell at most 40 000 units of DC to overseas markets at a unit selling price of $37.5. Under the
agreement, no sales commission is to be paid to the mail-order house but a total of $25 000 per month is to be paid by
Lucky Company to cover the cost of producing the mail-order catalogue.
REQUIRED:
(b) Calculate the respective breakeven point (in units) of DC under Alternative A and Alternative B.
(c) Suppose Lucky Company has to choose one of the alternatives. Explain which alternative you would recommend
to the management based on the respective total profits calculated under each alternative.
(d) Other than total profit, explain one financial factor that Lucky Company should consider if it decides to adopt
Alternative B.
Suppose the Company adopts Alternative A and considers reducing the cost of production through production process
automation. If a piece of equipment with a rental cost of $125 000 per annum is hired, the direct labour cost is
expected to be reduced by 40%.
(e) Should Lucky Company hire the equipment? Support your answer with calculations.
REQUIRED:
(a) Calculate the following items for the month of December 2012:
(1) the breakeven volume (in units)
(2) the margin of safety (in sales dollars)
On 1 May 2012, the management of the company spent $120 000 to hire a consultancy firm to investigate the
possibility of extending the business to produce and sell a new product, FS4, starting from 1 January 2013.
REQUIRED:
(b) What are opportunity cost and sunk cost respectively? Illustrate the meaning of each cost with an example
from the information provided above.
(c) If Hilary Ltd spends an additional $12 000 per annum on advertising and at the same time reduces the selling
price of FS2 and FS4 by 10%, the expected monthly sales volume for FS2 will be increased from 80 000 to 100 000
units, while FS4 will be increased from 15 000 to 18 750 units. Assuming the company does not keep any opening
and closing inventories for budgeted purposes, explain to the management whether the additional spending on
advertising, together with the selling price reduction, should be introduced starting from 1 January 2013. (Ignore
the time value of money.)
(d) If Hilary Ltd decides to spare more resources to explore new market potential and therefore will sell only 10 000
units of FS2 per month after the introduction of FS4, calculate the monthly sales revenue of FS4 which Hilary Ltd
needs to break even.
(v) In order to publicise her new brand, Mary will print some promotional leaflets to be distributed once a week in
the neighborhood. The printing cost of the leaflets amounts to $500 per month and a part-time worker is hired at
$1,000 per month for the distribution work.
(vi) A point-of-sale system costing $30,000 was purchased to help keep inventory record and cash transactions. In
addition, Mary furnished the shop with necessary furniture and fixtures by spending a further $60,000.
Depreciation is to be calculated at 12% per annum on a reducing balance basis for the point-of-sale system and
10% on cost for the furniture and fixtures.
(vii) The actual sales figures for the first quarter ended 31 March 20X7 are as follows:
Number of shirts
January 20X7 350
February 20X7 420
March 20X7 400
REQUIRED:
(a) Define direct costs and indirect costs and identify one example for each from the case above.
(b) Compare marginal costing with absorption costing with respect to inventory valuation and income determination.
(c) Prepare an income statement for the first quarter ended 31 March 20X7 using the marginal costing method,
assuming the FIFO method is adopted in the valuation of unsold goods.
(d) With the figures you have compiled in (c) above, calculate the breakeven point (in sales dollars) of the first
quarter ended 31 March 20X7.
Noting that there are several giant enterprises in the low-margin garment market, Marys father has always persuaded
Mary to discontinue her small business which is unlikely to be competitive enough to survive.
REQUIRED:
(e) Discuss two possible reasons why Mary is still enthusiastic about running a business of her own.
Projected sales revenue for the current year is $1,350,000. Budgeted fixed overheads for the year are
$200,000.
Required:
(a) Calculate the following for the current year:
(i) Break-even sales in units
(ii) Contribution margin ratio
(iii) Margin of safety ratio
(Calculations to two decimal places)
Required:
(b) Calculate for the coming year the sales volume (in units) required to maintain the current years
margin of safety ratio if the selling price remains unchanged. (Rounded to the nearest unit)
Budgeted sales units for the coming year are 40,000 units of Product M and 100,000 units of Product N.
Budgeted fixed costs amount to $9,900,000.
Required:
(a) Compute the whole break-even sales volume.
(b) Compute the break-even sales revenue for each product (correct to nearest dollar).
(c) Compute the whole contribution margin ratio (Calculations to two decimal places).
REQUIRED:
(a) Calculate the companys contribution margin (CM) ratio.
(b) Calculate the margin of safety ratio and comment the result.
(c) It is estimated that if the selling price is to be reduced by $0.50 in next month, sales volume would
be increased by 5%. Advise whether the company should adjust its selling price next month.
The production director is considering a proposal for purchasing a new machine in September 2009 to
automate the production process. The new machine will cost $1,562,000, and is expected to have 10 years of
useful life and a salvage value of $50,000. Depreciation will be provided on a straight line basis. The
automation is expected to reduce direct labour cost by 40% to $90 per chair with no impact on other costs.
The selling price is expected to remain at $800 per chair.
REQUIRED:
(c) Calculate the monthly breakeven sales amount and quantity for Winson Company if the new machine is
purchased.
(d) List three non-financial factors that Winson Company should consider before deciding whether to
purchase the machine and automate the production process.
Finally, the plan of producing yogurt is abandoned. The demand for the companys bottled milk is estimated
to increase to 250,000 bottles per month in 2008, whereas the companys total machine hour capacity is 200
hours per month with 200,000 bottles of milk produced. Assuming the same cost estimates above, the
management is considering the following two alternatives.
(1) Increase the machine hour capacity by spending additional variable costs; or
(2) Produce 200,000 bottles of milk but increase the selling price so as to attain a total contribution equal to
that realized from selling 250,000 bottles at the current price.
You are required to:
(c) For alternative (1), calculate the maximum amount of additional variable costs per machine hour that
Arno Company with be willing to spend.
(d) For alternative (2), calculate (to two decimal places) the minimum price Arno Company should set for
the bottled milk.
(e) What other factors should Arno Company consider in deciding how to cope with the increased demand?
The market for Product D is saturated whereas the market for Product S is expanding. The sales manager
estimated that the demand for Product D would be reduced by 50% in 2005. He suggested the following two
alternatives:
Alternative 1: Abandon Product D and focus on Product S only.
Alternative 2: Reduce the production and sales of Product D by 50% to 500 units and sell them at the existing
price; Increase the production and sales of Product S.
For both alternatives, the following strategies will be adopted for Product S to boost its sales:
(i) Reduce the selling price by 10%
(ii) Increase the commission to salesmen to 10% of sales; and
(iii) Incur additional promotion expenses of $166,000 in 2005.
The annual fixed costs would remain unchanged in all situations.
Required:
(b) Assuming Alternative 1 is adopted, calculate the breakeven point (in sales volume) of Product S in 2005.
(c) Assuming Alternative 2 is adopted, calculate the quantity of Product S to be sold in 2005 if Tin Tin Ltd is
to maintain the companys net profit as that in 2004.
(d) Suppose the maximum capacity of Tin Tin Ltd is 100,000 machine hours while Product D and Product S
will require machine hours of 60 hours and 8 hours for each unit of product respectively. Advise which
alternative should be adopted, supporting with calculations on the respective total contributions under
the two alternatives.