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# Suggested Solution for Mid Term

Sem 1, 16/17

## MCQ (15 marks)

1. B 4 C 7. B 10. B 13. B
2. A 5. D 8. D 11. A 14. D
3. D 6. D 9. A 12. C 15. A

## 1. BE in units = F (p v) = \$324,000 (\$90 \$63) = 12,000 units

2.Required sales, in units and in dollars, to achieve pre-tax profit goal of \$30,000:
units = (F + B) cm per unit = (\$324,000 + \$30,000) \$27/unit
= \$354,000 \$27/unit = 13,111.11 units
6 / 3 = 2 marks
3. Contribution income statement:

## Sales (13,111 units \$90/unit) = \$1,179,990 of

Less: Variable cost (@ \$63/unit) = \$825,993 of
Contribution margin (@ \$27/unit) = \$353,997
Less: Fixed costs \$324,000
Net income = \$29,997

## Note: Difference of \$3 is due to rounding up in terms of sales volume in units.

6 / 3 = 2 marks

4. Cost structure refers to the relative proportion of fixed and variable costs in an
organization. For this company the cost structure is 72% variable and 28% fixed. This
company is low in fixed cost component. This company with low fixed cost structures
enjoy greater stability in income across good and bad years.

## Operating leverage = Contribution margin / net income

\$353,997 / 30,000 = 11.8
If there is a 20% increase in sales, there will be 236% increase in income = 11.8 x 20% =
236% of
8/2 = 4 marks

5. In my opinion the manager is wrong because the Loss will increase by \$19,500, from -
\$27,000 to - \$46,500

8/2 = 4 marks

Or,
= Increase in CM Increase in Fixed Costs

## = (\$135,000 0.3) \$60,000 = (\$19,500)

8/2 = 4 marks

6. The company should not proceed because Profit will decrease \$109,400, from a loss of
\$27,000 to a loss of \$136,400

## Planned reduction in selling price/unit = 10%

Estimated increase in sales volume (units) = 20%
Estimated increase in fixed costs = \$50,000

8/2 = 4 marks

7. It was a wise change. The total reduction in variable cost is \$5 11,000 = \$55,000,
while the increase in fixed costs is \$30,000, resulting in a net savings of \$25,000.

## Origional Change NEW

Sales 990,000 990,000
Variable cost 693,000 (55,000) 638,000
Contribution margin 297,000 352,000
Fixed Cost 324,000 30,000 354,000
Income / Loss (27,000) (2,000)
8/2 = 4 marks
Question 2 (a) 20 marks
a).
January Feb March April

## Sales (units) FGs 20,000 35,000 60,000 40,000

+ End Inv FGs (units)(20%) 7,000 12,000 8,000 6,000
(.2x35k) (.2x60k) (.2x 40k) (.2x30k)
Units required 27,000 // 47,000 // 68,000 // 46,000
Less: Begin Inv of FG (units) (4,000) (7000) (12,000) (8,000)
FGs to produce (units) 23,000/ 40,000/ 56,000/ 38,000
X Switches per unit x3 x3 x3 x3
No of switches req for 69,000 // 120,000 // 168,000 // 114,000
production (units)

15 ticks/3 = 5 marks

## No of switches req for 69,000 / 120,000 / 168,000 /

production (units)
+ End Inv Switches (units) 36,000 50,400 34,200
(.3x120k) (.3x168k) (.3x114k)
- Begi Inv Switches (units) (20,700) (36,000) (50,400)
(.3x69k)
No of Switches to be 84,300 / 134,400 / 151,800 /
purchased (units)
Cost per switch (\$5*.8) \$4 \$4 \$4
Budgeted purchases (\$) 337,200 // 537,600 // 607,200 // \$1,482,000 ///
(OF)
15 ticks/3 = 5 marks

## Question 3 (b) ( 5 marks)

1) Construct the direct labor budget for the next two months.
July August

## 2) Explain participative budgeting as effective budgeting orientation.

Participative budgeting gets all level of managers from top management to line managers into
the budgeting process (1 mark). It results the performance targets set to be aligned with
strategic objectives, operational capacity and competitive environment of the business
(Justification 3 marks- any appropriate answer). The absence of participation of line
managers in the budgeting leads to weak budgeting, where top management would set
unachievable performance targets (1 marks).