MODULE 1 INTRODUCTION AND MANAGEMENT DECISION

MAKING

HOMEWORK SOLUTIONS
Chapter 1
Q2. Describe how accounting information helps shareholders and lenders to make
decisions concerning the operations and performance of the entity
Shareholders and potential shareholders would use the accounting information to make
decisions on whether or not to invest in the business (Or in the case of a company, whether to
buy or sell stock). They would try to determine whether or not they believe the company will
grow in the future and hence provide a suitable return on their investment.
Lenders would use the accounting information to determine the companys ability to replay
current debt and the level of risk associated with lending funds to it. The level of risk can also
influence the interest rate that will be charged, with a risker business being charged a higher
interest rate to mitigate the effects of a potential default on the loan.

Q3. List five stakeholders of accounting information. Describe the requirements for
each one, for example, lenders would need information regarding the businesss ability
to repay debt and service a loan

Stakeholder
Investor

Banks
Suppliers
Employees
Consumers
Government
Authorities
Regulatory
Bodies
Community
Special
Interest
Groups

Accounting Information and decision making

Information to determine the future profitability of the entity, to assess the
future cash flows for dividends and the possibility of capital growth of
investment
Information to determine whether the entity has the ability to repay a loan
Information to determine an entitys ability to repay debt associated with
purchases
Information concerning job security, the potential to pay awards and
bonuses, and promotional opportunities
Information regarding the continuity of the entity and the ability to provide
the appropriate goods and services
Information to determine the amount of tax that should be paid and any
future taxation liabilities and taxation assets
Information to determine whether the entity is abiding by regulations such
as the Corporations Act and Australian taxation law
Information to determine whether the entity is contributing positively to the
general welfare and economic growth of the local community
Information to determine whether the entity has considered environmental,
social or industrial aspects during its operations

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Q5. Give an example of the role accounting information plays in the investment
planning for a retired cricketer and a retired public servant.
Accounting provides us with a language to help understand the decision making process
associated with investment planning. A retired cricketer would use accounting to initially
work out a strategy for investing earnings and then to help keep track of his/her investments
which could include property, shares, luxury cars etc. A retired public servant would have a
superannuation fund and possibly other investments. Accounting knowledge would assist in
helping to interpret the annual returns and fees from a superannuation policy and the
performance of the assets invested by the superannuation fund. It could also assist in
choosing investments that would provide most benefits to the retiree

Chapter 2
Q1

Using examples, distinguish between fixed and variable costs.

Total fixed costs do not change within the relevant range of activity. For example, regardless
of the level of production, a manufacturer would still need to pay the rent, insurance and
salaries of permanent staff.
Variable Costs per unit do not change, however total variable costs change proportionately
with changes in activity. For example a manufacturer who produces wooden tables. The cost
per table would be the same; however the total cost of manufacturing the tables will change
proportionate to the level of production. Say each table consumed $10 of variable costs (such
as wood, nails, glue), if 10 tables were manufactured the total variable cost would be $100
(10 tables $10) and if 100 tables manufactured the total variable cost would be $1000 (100
tables $10).
Q2

Explain the meaning of the term mixed cost and give five examples of mixed
costs.

A mixed cost is one that has both fixed and variable cost characteristics. Five examples are:
1. Electricity supply charge (fixed) and the usage based on number of kilowatts
(variable)
2. Home line telephone rental charge (fixed) and the usage based on number of calls
(variable)
3. Internet charges with limited download fixed rate for given number of MBs and
then a charge per MB used thereafter which would be variable
4. Television advertisement $5000 fixed charge to purchase and then a fee to show on
the television program (variable)
5. Water Rates supply charge (fixed) and the usage based on litres used (variable).
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Q10

Chloe Enterprises operates a single-product entity. Data relating to the product

for 2015 were as follows.
Annual volume
Selling price per unit
Variable manufacturing cost per unit
Annual fixed manufacturing costs
Variable marketing and distribution costs
per unit
Annual fixed non-manufacturing costs

32 000 units
$60
$28
$120 000
$12
$360 000

Required:
a. Calculate the break-even in both dollars and units for 2015.
b. Calculate the margin of safety in both units and sales dollars.
c. Calculate the profit achieved in 2015 given the annual volume of 32 000
units.
d. Changes in marketing strategy are planned for 2016. This would increase
variable marketing and distribution costs by $4 per unit, and reduce fixed
non-manufacturing costs by $80 000 per year.
Calculate the units that would need to be sold in 2016 to achieve the same
profit as in 2015.
e. Would you recommend the change? Explain.

a.
Selling price
Less
variable manufacturing
variable marketing etc.
Contribution margin per unit

$60
$28
$12

$40
$20

Break-even (Unit)

= $480 000/ ($20) = 24 000 units

Break-even ($)

= 24,000 * $60 = $1,440,000.

b.
Margin of Safety =
Units
= 8000 units
Dollars
= $480 000

= Sales 32000 units less breakeven 24 000 units

= 8000 units x $60

c.
Profit = ($60*32 000 units) ($40*32000 units) $480 000 = $160 000
d.
Contribution margin will decrease due to increased variable costs
Currently $20 less additional $4 variable marketing = $16
To achieve same profit as 2015= ($360 000 + $120 000 - $80000+160 000)/ $16 = 35 000
units
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e.
Based on the increased number of units required to achieve the same profit, the change is not
recommended in the short term.

Q35

Outsource computations, qualitative factors

Diamond Light Company incurred the following costs to produce 50 000 light switches for
floor lamps in 2016.
Direct materials
Direct labour
Variable manufacturing overhead
Fixed manufacturing overhead
Total manufacturing costs

$ 100 000
150 000
80 000
120 000
$450 000

The Ignition Company has offered to supply the switches for $16 per unit. An analysis of the
overhead costs has identified that if the switches are outsourced, Diamond Light Company
would eliminate $20 000 of fixed costs, and could use the released production capacity to
generate additional income of $56 000 from producing a different product.
Required:
a. From a financial perspective, should the light switches be outsourced? Show
calculations.
b. What qualitative factors need to be considered in the outsourcing decision?
a.
Financial analysis of decision to outsource light switches.
Relevant Costs
Make
Direct materials
$100 000
Direct labour
$150 000
Variable manufacturing overhead
$80 000
Purchase Price
Fixed Costs
Additional income if outsourced
Costs
$330 000
Additional costs if switches purchased from Ignition
Company
b.
Qualitative issues:
Reliability of supply
Quality of switch
Potential for price increases in the future
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Buy

$800 000
($20 000)
($56 000)
$724 000
$394 000