Question 1:
1. Variable Cost per Unit:
Variable Cost per Unit=High Cost−Low CostHigh Activity Level−Low Activity Level\
text{Variable Cost per Unit} = \frac{\text{High Cost} - \text{Low Cost}}{\text{High
Activity Level} - \text{Low Activity
Level}}Variable Cost per Unit=High Activity Level−Low Activity LevelHigh Cost−Low
Cost =8100−24003530−540=1.91 (approx.)= \frac{8100 - 2400}{3530 - 540} = 1.91 \, \
text{(approx.)}=3530−5408100−2400=1.91(approx.)
2. Fixed Cost:
Fixed Cost=High Cost−(Variable Cost per Unit×High Activity Level)\text{Fixed Cost} =
\text{High Cost} - (\text{Variable Cost per Unit} \times \text{High Activity
Level})Fixed Cost=High Cost−(Variable Cost per Unit×High Activity Level)
=8100−(1.91×3530)=1370.57 (approx.)= 8100 - (1.91 \times 3530) = 1370.57 \, \
text{(approx.)}=8100−(1.91×3530)=1370.57(approx.)
3. Total Cost Equation:
Total Cost=1370.57+1.91×Occupancy Days\text{Total Cost} = 1370.57 + 1.91 \times \
text{Occupancy Days}Total Cost=1370.57+1.91×Occupancy Days
Question 2:
1. Predetermined Overhead Rate for Department A:
Rate=Manufacturing OverheadDirect Labour Cost\text{Rate} = \frac{\
text{Manufacturing Overhead}}{\text{Direct Labour
Cost}}Rate=Direct Labour CostManufacturing Overhead =100,00040,000=2.5= \
frac{100,000}{40,000} = 2.5=40,000100,000=2.5
2. Predetermined Overhead Rate for Department B:
Rate=Manufacturing OverheadMachine Hours\text{Rate} = \frac{\text{Manufacturing
Overhead}}{\text{Machine Hours}}Rate=Machine HoursManufacturing Overhead
=120,00016,000=7.5= \frac{120,000}{16,000} = 7.5=16,000120,000=7.5
Final Answers:
1. Question 1 Total Cost Formula:
Total Cost=1370.57+1.91×Occupancy Days\text{Total Cost} = 1370.57 + 1.91 \times \
text{Occupancy Days}Total Cost=1370.57+1.91×Occupancy Days
2. Question 2 Predetermined Overhead Rates:
o Department A: 2.5
o Department B: 7.5
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Part 1: Contribution Margin Ratio (CM Ratio)
\text{CM Ratio} = \frac{\text{Contribution Margin}}{\text{Sales}} = \frac{336,000}{480,000}
= 0.7 \, \text{(70%)}.
Part 2: Break-even Sales in Dollars
Break-even Sales=Fixed ExpensesCM Ratio=240,0000.7=342,857.14.\text{Break-even Sales}
= \frac{\text{Fixed Expenses}}{\text{CM Ratio}} = \frac{240,000}{0.7} = 342,857.14.Break-
even Sales=CM RatioFixed Expenses=0.7240,000=342,857.14.
Part 3: Operating Income with $40,000 Sales Increase
Additional Contribution Margin=Sales Increase×CM Ratio=40,000×0.7=28,000.\text{Additional
Contribution Margin} = \text{Sales Increase} \times \text{CM Ratio} = 40,000 \times 0.7 =
28,000.Additional Contribution Margin=Sales Increase×CM Ratio=40,000×0.7=28,000.
New Operating Income=Operating Income+Additional Contribution Margin=96,000+28,000=12
4,000.\text{New Operating Income} = \text{Operating Income} + \text{Additional Contribution
Margin} = 96,000 + 28,000 =
124,000.New Operating Income=Operating Income+Additional Contribution Margin=96,000+28
,000=124,000.
Part 4: Degree of Operating Leverage
Degree of Operating Leverage=Contribution MarginOperating Income=336,00096,000=3.5.\
text{Degree of Operating Leverage} = \frac{\text{Contribution Margin}}{\text{Operating
Income}} = \frac{336,000}{96,000} =
3.5.Degree of Operating Leverage=Operating IncomeContribution Margin=96,000336,000=3.5.
Part 5a: 16% Increase in Sales
\text{Percentage Increase in Operating Income} = \text{Sales Increase Percentage} \times \
text{Degree of Operating Leverage} = 0.16 \times 3.5 = 0.56 \, \text{(56%)}.
Dollar Increase in Operating Income=Operating Income×Percentage Increase=96,000×0.56=53,7
60.\text{Dollar Increase in Operating Income} = \text{Operating Income} \times \
text{Percentage Increase} = 96,000 \times 0.56 =
53,760.Dollar Increase in Operating Income=Operating Income×Percentage Increase=96,000×0.
56=53,760.
Part 5b: Price Reduction, Advertising Increase, and Unit Sales Increase
New Selling Price: 20×0.9=1820 \times 0.9 = 1820×0.9=18.
New Units Sold: 24,000×1.25=30,00024,000 \times 1.25 = 30,00024,000×1.25=30,000.
New Sales: 18×30,000=540,00018 \times 30,000 = 540,00018×30,000=540,000.
New Variable Expenses: 144,00024,000×30,000=180,000\frac{144,000}{24,000} \
times 30,000 = 180,00024,000144,000×30,000=180,000.
New Contribution Margin: 540,000−180,000=360,000540,000 - 180,000 =
360,000540,000−180,000=360,000.
New Fixed Expenses: 240,000+30,000=270,000240,000 + 30,000 =
270,000240,000+30,000=270,000.
New Operating Income=New Contribution Margin−New Fixed Expenses=360,000−270,000=90,
000.\text{New Operating Income} = \text{New Contribution Margin} - \text{New Fixed
Expenses} = 360,000 - 270,000 =
90,000.New Operating Income=New Contribution Margin−New Fixed Expenses=360,000−270,
000=90,000.
Part 6: Required Advertising with Increased Sales Commission
To maintain a $96,000 operating income:
New Total Sales Required:
Operating Income+Fixed ExpensesCM Ratio=96,000+240,0000.7=480,000\frac{\
text{Operating Income} + \text{Fixed Expenses}}{\text{CM Ratio}} = \frac{96,000 +
240,000}{0.7} = 480,000CM RatioOperating Income+Fixed Expenses
=0.796,000+240,000=480,000.
Since total sales remain at $480,000 with no extra advertising, any advertising spending
reduction offsets variable cost increases due to commission.
\text{Required Advertising Reduction} = -24,000 \, \text{(cost savings or negative expense)}. \]
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Part 1: Schedule of Cost of Goods Manufactured
Direct Materials Used:
=Raw Materials Inventory (Beginning)+Purchases of Raw Materials−Raw Materials Inve
ntory (Ending)= \text{Raw Materials Inventory (Beginning)} + \text{Purchases of Raw
Materials} - \text{Raw Materials Inventory
(Ending)}=Raw Materials Inventory (Beginning)+Purchases of Raw Materials−Raw Mat
erials Inventory (Ending) =44,500+376,500−73,500=347,500= 44,500 + 376,500 -
73,500 = 347,500=44,500+376,500−73,500=347,500
Total Manufacturing Costs:
=Direct Materials Used+Direct Labour+Factory Overheads= \text{Direct Materials
Used} + \text{Direct Labour} + \text{Factory
Overheads}=Direct Materials Used+Direct Labour+Factory Overheads
=347,500+247,700+(195,500+21,100+124,400+113,500)=1,049,700= 347,500 + 247,700
+ (195,500 + 21,100 + 124,400 + 113,500) =
1,049,700=347,500+247,700+(195,500+21,100+124,400+113,500)=1,049,700
Cost of Goods Manufactured:
=Total Manufacturing Costs+Work in Process Inventory (Beginning)−Work in Process In
ventory (Ending)= \text{Total Manufacturing Costs} + \text{Work in Process Inventory
(Beginning)} - \text{Work in Process Inventory
(Ending)}=Total Manufacturing Costs+Work in Process Inventory (Beginning)−Work in
Process Inventory (Ending) =1,049,700+28,550−122,200=956,050= 1,049,700 + 28,550 -
122,200 = 956,050=1,049,700+28,550−122,200=956,050
Part 2: Schedule of Cost of Goods Sold
Cost of Goods Available for Sale:
=Cost of Goods Manufactured+Finished Goods Inventory (Beginning)= \text{Cost of
Goods Manufactured} + \text{Finished Goods Inventory
(Beginning)}=Cost of Goods Manufactured+Finished Goods Inventory (Beginning)
=956,050+41,500=997,550= 956,050 + 41,500 = 997,550=956,050+41,500=997,550
Cost of Goods Sold:
=Cost of Goods Available for Sale−Finished Goods Inventory (Ending)= \text{Cost of
Goods Available for Sale} - \text{Finished Goods Inventory
(Ending)}=Cost of Goods Available for Sale−Finished Goods Inventory (Ending)
=997,550−166,600=830,950= 997,550 - 166,600 = 830,950=997,550−166,600=830,950
Part 3: Income Statement
Gross Profit:
=Sales−Cost of Goods Sold= \text{Sales} - \text{Cost of Goods
Sold}=Sales−Cost of Goods Sold =2,064,000−830,950=1,233,050= 2,064,000 - 830,950
= 1,233,050=2,064,000−830,950=1,233,050
Operating Income:
=Gross Profit−Selling Expenses−Administrative Expenses= \text{Gross Profit} - \
text{Selling Expenses} - \text{Administrative
Expenses}=Gross Profit−Selling Expenses−Administrative Expenses
=1,233,050−329,900−288,800=614,350= 1,233,050 - 329,900 - 288,800 =
614,350=1,233,050−329,900−288,800=614,350
Part 4: Average Cost per Unit
Average Cost per Unit (Direct Labour):
=Direct LabourUnits Produced=247,70010,000=24.77= \frac{\text{Direct Labour}}{\
text{Units Produced}} = \frac{247,700}{10,000} = 24.77=Units ProducedDirect Labour
=10,000247,700=24.77
Average Cost per Unit (Factory Insurance):
=Factory InsuranceUnits Produced=21,10010,000=2.11= \frac{\text{Factory Insurance}}
{\text{Units Produced}} = \frac{21,100}{10,000} =
2.11=Units ProducedFactory Insurance=10,00021,100=2.11
Part 5: Cost for 12,000 Units
Expected Cost (Direct Labour):
=Average Cost per Unit (Direct Labour)×Expected Units Produced= \text{Average Cost
per Unit (Direct Labour)} \times \text{Expected Units
Produced}=Average Cost per Unit (Direct Labour)×Expected Units Produced
=24.77×12,000=297,240= 24.77 \times 12,000 = 297,240=24.77×12,000=297,240
Expected Cost (Factory Insurance):
=Average Cost per Unit (Factory Insurance)×Expected Units Produced= \text{Average
Cost per Unit (Factory Insurance)} \times \text{Expected Units
Produced}=Average Cost per Unit (Factory Insurance)×Expected Units Produced
=2.11×12,000=25,320= 2.11 \times 12,000 = 25,320=2.11×12,000=25,320
Final Answers:
1. Cost of Goods Manufactured: $956,050
2. Cost of Goods Sold: $830,950
3. Gross Profit: $1,233,050
Operating Income: $614,350
4. Average Cost per Unit:
o Direct Labour: $24.77
o Factory Insurance: $2.11
5. Expected Costs for 12,000 Units:
o Direct Labour: $297,240
o Factory Insurance: $25,320
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