Copyright Rowland Atiase, 2014

Solutions to Sample Problems I

Copyright Rowland Atiase, 2014

Questions 1, 2 and 3

A B Total
Sales Mix 1 3
Price $4 $12
B/E (units) 1500 4500 6000
B/E (sales) $6000 $54000 $60,000

Total B/E sales = Z = $60000
Note:CM/u = SP/u VC/u
CM/U = SP/u VC/u
SP/u SP/u SP/u

CMRatio = 1 VCRatio
Overall Contribution Margin = 40%
Overall VCRatio = 1 40% = 60%
Total VC at B/E = 60% x Z = Y = $36000
Total FC = X = TCM at B/E
= CMR x B/E Sales ($)
= 40% x $60,000
= $24,000

WASP/unit = [($4x1) + ($12x3)]/4
= $10.00
WACM/unit = CMR x WASP/unit
= 40% x $10.00
= $4.00

Copyright Rowland Atiase, 2014

Question 1

Slope changing at B/E

Original WACM/unit $4.00
Less: WA additional VC = [1.30 + (3*0.90)]/4 = -$1.00
New WACM/unit $3.00

Note: NI = TCM beyond B/E

Sales beyond B/E to earn CM of $30000 = 30000/3.00 = 10000 units

Total Sales = (6000+10000) = 16000 units made up of 4000 units of
A and 12000 units of B.

Alternative solution (Note slope changes at B/E)

X = X
BE
+ X
BBE

= FC NI
-------------- + --------------
WACM/U1 WACM/U2

= FC/4 + NI/3
= 24000/4 + 30000/3
= 16000 UNITS

Question 2

Slope changing beyond B/E

The slope changes after X = 7200 units
+$1.30 for each unit of A beyond 1800 units
+$0.90 for each unit of B beyond 5400 units

X = (FC + NI
1
)/WACM
1
+ NI2/WACM
2

NI = NI
1
+ NI
2
= $19800
Copyright Rowland Atiase, 2014

X
B/E
= 6000 units
NI = (7200-6000) x 4
= $4800
NI2 = 19800-4800 = $15000

X = (24000 +4800)/4.00 + 15000/3.00
X = 7200 + 15000/3.00 = 7200 + 5000 = 12200 units
Made up of 3050 units of A and 9150 units of B


Question 3

Slope changes before B/E

TFC = FC1 + FC2 = $24000

Also,
FC1 = 4000 x 4 = $16000

FC2 = $8000
NI = $16000
Now ,

X
NI
= FC1/WACM1 + (FC2 + NI)/WACM2
= 16000/4.00 + (8000 + 16000)/3.00
= 4000 + 8000
= 12000 units made up of 3,000 units of A and 9,000 units of B

Copyright Rowland Atiase, 2014

Question 4

Let X be the units produced and sold.

NI = -FC + CM/unit x X

65,000 = -FC + 25,000 x CM/unit (1)

-20,000 = -FC + 8,000 x CM/unit (2)

85,000 = 17,000 x CM/unit (1) (2)

CM/unit = $5 (3)

Substitute CM/unit from (3) in (1)

65,000 = -FC + 25,000 x $5
FC = $60,000
B/E = 60,000/5 = 12,000 units

Question 5

Fixed manufacturing overhead (FOH) charged to the period under direct
costing = F * D.
= $4.00/unit * 100,000 units
= $400,000

Question 6

Under Absorption Costing, the under/over applied fixed manufacturing
OH in 19X9 that is charged to the period is:

F (D Vp) = $4 * (100,000 25,000)
= $300,000 under applied




Copyright Rowland Atiase, 2014

Question 7

NI
AC
NI
DC
= F x (U
EI
U
BI
)
= 4 x (20,000 15,000)
= NI
AC
greater by $20,000

Question 8

NI
AC
NI
DC
= (F
EI
x U
EI
) - (F
BI
x U
BI
)
= (3 x 17,500) (4 x 15,000)
= -$7,500

NI
DC
higher by $7,500


Question 9 and 10

Question 9

Solve for Vs using the above equation

Vs = (50,000 + {20 x (40,000 30,000)} + 150,000) / (60-20)
Vs = 10,000 units

Question 10

Solve for Vp in the above equation

15,000 = (50,000 + {20 x (40,000 Vp)} + 150,000)/(60 - 20)
Vp = 20,000 units



Vs F Fx D VP NI
CM/u F
S A AC

& ( )
Copyright Rowland Atiase, 2014

Question 11

Keep Replace Difference
Cost of new machine 125,000
Operating costs 480,000 360,000
Disposal value of old machine (7000)
Salvage value of new machine (20000)

Total Relevant Costs $480,000 $458,000 $22,000

Net income under replacement will be higher by $22,000.

Question 12

(1) Objective criterion/ Maximize CM subject to constraining factors.
(2) Find the Binding Technological Constraint given the
market/demand constraint.

DLHRs MHRs

Hours available 55,000 42,000

HRs required to produce 5,000A 25,000 25,000
HRs required to produce 3000B 18,000 12,000
HRs required to produce 1,100C 11,000 11,000

Total HRs required for 5,000A, 3,000B & 1,100C 54,000 48,000

There are enough labor hours to produce all units of A, B and C that can
be sold. But there are not enough MHRs. Thus, MHRs is the Binding
(scarce) Constraint.





Copyright Rowland Atiase, 2014

(3) Determine the CM/MHR for each product (i.e. A & B) and rank
them in order of profitability.


A B C
CM/Unit $82 $85 $110
MHRs/Unit 5 4 10
CM/MHR $16.40 $21.25 $11

Ranking in order of profitability 2
nd
1
st
3
rd



(4) Optimal production and mix
Therefore produce all B demanded, then all A demanded and devote
the remaining scarce resources to produce as many units of C as
possible.

Optimal feasible production and sales mix is 3,000 B (requiring
12,000 MHRs), 5,000 A (requiring 25,000 MHRs) and 500 C
(requiring 5,000 MHRs).



Question 13

See solution packet to HO #8 in Chapter 11 Day 2 Handout (HO)

Question 14

See solution packet to HO #9 in Chapter 11 Day 2 Handout (HO)