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11
January 2
2012
Muhammad Saad Salman Roll no. 70 Section-B
Page 2
Variable Cost = Change in cost / Change in activity = 2400/ 800 = $3 per patient admitted
Now the fixed cost is:
2nd Part:
The Cost formula is
Y = a + bx
So,
Y = 9500 + 3x
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Units Produced
4,500 11,000 12,000 5,500 9,000 10,500 7,500 5,000 11,500 6,000 8,500 10,000 6,500 9,500 8,000
Processing Cost
38,000 52,000 56,000 40,000 47,000 52,000 44,000 41,000 52,000 43,000 48,000 50,000 44,000 48,000 46,000
Scattered Diagram
60,000 50,000
Processing Cost
40,000 30,000 20,000 10,000 0 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000
Units Produced
Page 4
Y=a+bX Here, if we extend the line it will touch at $30,000, which means that our fixed cost is $30,000. If we take unit produced (activity) at 8,000 we will get: 46,000=30,000+b8,000 B=46,000 30,000/8000 B= $2
Units Shipped
3 6 4 5 7 8 2
A-Part:
Unit Shipped High Activity Level (June) Low Activity Level (July) Change
8 2 6
Shipping Expense
2,700 1,200 1,500
Page 5
Variable Cost= Change in Shipping Expense/ Units Shipped = 1500/6 = $250 Total Fixed cost = Total Cost Variable Cost = 2700 (250*8) = 2700 2000 = $700
So, now
B-Part:
3,000
2,500
2,000
1,500
1,000
500
0 0 1 2 3 4 5 6 7 8 9
Units Shipped If we extend the line it will touch at $900 at 0 Unit produce. It means that our Fixed Cost is $900. Now, we will take 500 units shipped at $2000.
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Y=a+bX 2000 = 900 + b (500) 2000 - 900 = b (500) 1100/ 500 = b B = $ 2.2 per unit shipped
C-Part:
The cost of shipping units is likely to depend on the: 1. weight and volume of the units 2. the distance traveled Because more the weight of the units more you have to pay the amount or more the distance travel you have to pay the more prices.
3. Knowledge of cost behaviour patterns help to a manager in analyzing the cost structure in this manner that he can get the accurate cost structure because every cost dont behave in a same manner. For example, if one cost is increasing then might be there is a cost which is decreasing so cost pattern really help managers to analyze their companys performance.
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Sales Variable Expense Contribution Margin Fixed Expense Net Operating Income
1. CM Ratio = Unit contribution margin / Unit Selling price =15 / 60 = 25% Variable Expense Ratio = Variable expense / Selling Price = 45 / 60 = 75% 2. Profit = Unit CM x Q Fixed Expense 0 = (60 45) x Q 240000 15Q = 240000 Q = 16,000 units or at $60 per unit, $960,000 3. Expected increase in contribution margin = Increase in sales x CM Ratio = 400000 x 25% = $100,000 4. Unit Sales to attain the target profit: = (Target Profit + Fixed Expenses) / CM per unit = (90000 + 240000) / 15 = 22,000 units
Cost and Management Accounting Muhammad Saad Salman Page 8
5. Margin of safety in dollars = Total sales Break-even Sales = 1200000 960000 = $ 240,000 Margin of safety in percentage = Margin of safety in dollars / Total sales = 240000 / 1200000 = 20% 6. Degree of Operating Leverage: = Contribution Margin / Net operating income = 300000 / 60000 =5 b. Expected Increase in Net Operating Income = Expected Increase in sales x degree of operating leverage = 8% x 5 = 40% C. if 8% sales increase then total units will become 21,600 Total Per Unit 1,296,000 60 972,000 45 324,000 15 240,000 84,000 Percentage sale 100% 75% 25%
Sales Variable Expense Contribution Margin Fixed Expense Net Operating Income
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Part 7:
a. A 20% increase in sales would result in 24,000 units being sold. So,
Sales Variable Expense Contribution Margin Fixed Expense Net Operating Income
Per Unit 60 48 12
Unit sales to breakeven = Fixed Expenses / Unit CM = 210000 / 12 = 17,500 units Dollar Sales to breakeven = Units to breakeven x per unit price = 17500 x 60 = $1,050,000
b. Yes, based on these data the changes should be made. The changes increase the companys net operating income from the present $60,000 to $78,000 per year. Although the changes also result in the higher break-even point (17,500 units as compared to the present 16,000 units), the companys margin of safety actually becomes greater than before:
Margin of safety in dollars = Total sales Break-even analysis = 1,440,000 1,050,000 = $390,000
The companys present margin of safety is $240,000. Thus several benefits will result from the proposed change. Cost and Management Accounting Muhammad Saad Salman Page 10
Chapter 6:
Exercise 6-1: Preparing a Contribution Format Income Statement:
Total
Sales (10,000 Units) Variable Expense 350,000 200,000
Units
10,000 10,000
Per Unit
35 20
Contribution Margin
Fixed Expenses Net Operating Expenses
150,000
135,000 15,000
15
Per Unit
35 20
Total
353,500 202,000
Contribution Margin
Fixed Expenses
15
151,500
135,000
16,500
Per Unit
35 20
Total
346,500 198,000
Contribution Margin
Fixed Expenses
15
148,500
135,000
13,500
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Per Unit
35 20
Total
315,000 180,000
Contribution Margin
Fixed Expenses
15
135,000
135,000
Exercise 6-8:
Selling Price Per Unit 30 Variable Expense Per Unit 20 Fixed Expense Per Month 7500 Total Units Per Month 1000
To find out the margin of safety we must calculate the break-even point. So, Profit= unit CM x Q Fixed Expenses 0 = (P V) x Q 7500 7500 = (30 20) x Q 7500 = 10Q Q = 750 units So it means that break-even point is at 750 units.
Cost and Management Accounting Muhammad Saad Salman Page 12
Unit Price 30 30
30000 22500
7500
Margin of Safety in percentage = Margin of safety in dollars / Sales at 1000 units = 7500 / 30000 = 0.25 = 25%
Exercise 6-12:
Sales Variable Expense Contribution Margin Fixed Expense Net Operating Income Total 450,000 180,000 270,000 216,000 54,000 Per Unit 30 12 18
1. Break-even Analysis:
Profit = Unit CM x Q Fixed Expenses 0 = (P V) x Q -216000 0 = 18Q 216000 Q = 216000/18 Q = 12,000 unit That was the breakeven analysis in units now the breakeven analysis in dollars is as follow: Dollar sales to attain breakeven = (Target profit + Fixed Expenses) / CM Ratio
Cost and Management Accounting Muhammad Saad Salman Page 13
= (0 + 216000) / 0.6 = 216000 / 0.6 = $ 360,000 2. Total contribution margin at breakeven is equal to Fixed Expense i.e. $216,000.
3rd Part:
Profit = Unit CM x Q Fixed Expenses 90000 = 18Q 216000 Q = (216000 + 90000) / 18 Q = 17,000 So we need to sale 17,000 units in order to gain the profit of $90,000. Total 510,000 204,000 306,000 216,000 90,000 Per Unit 30 12 18 Units need to be Sold 17,000
Sales Variable Expense Contribution Margin Fixed Expense Net Operating Income
4th Part:
Total Units at current level = 450000 / 30 = 15,000 units Unit Price 30 30 Total Units 15,000 12,000
450000 360000
90000
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5th Part:
Companys CM Ratio = 18 / 30 = 0.6 = 60% If the fixed expenses are same then companys net operating income would be increased by: =50,000 x 60% = $ 30,000
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15% Commission
Sales Variable Expenses: Manufacturing Commission Total Variable Expenses 16,000,000 7,200,000 2,400,000 9,600,000 100%
20% Commission
16,000,000 7,200,000 3200000 10,400,000 100%
7.5% Commission
16,000,000 7,200,000 1200000 8,400,000 100%
60%
65%
52.5%
Contribution Margin
Fixed Expenses: Manufacturing Overheads Marketing Administrative Interest Total Fixed Expenses EBIT Income Tax (30%)
6,400,000
2,340,000 120,000 1,800,000 540,000 4,800,000 1,600,000 480,000
40%
5,600,000
2,340,000 120,000 1,800,000 540,000 4,800,000 800,000 240,000
35%
7,600,000
2,340,000
47.5%
2,520,000 1,725,000
540,000
Net Income
1,120,000
560,000
Part 1:
a. Breakeven point in dollar sales at 15% Commission = Fixed Expense / CM Ratio =4,800,000 / 0.4 = $12,000,000
b. Breakeven point in dollar sales at 20% Commission = Fixed Expense / CM Ratio =4,800,000 / 0.35 = $13,714,285.7
c. Breakeven point in dollar sales at own sale force = Fixed Expense / CM Ratio = 7,125,000 / 0.475 = $15,000,000
Part 2:
Well from the above income statement we can see in the 20% commission column that for getting the desire profit of $1,120,000 with 20% commission the EBIT should be 1,600,000. So, we can compute it as follow:
Dollar sales = (Targeted EBIT + Fixed Expenses) / CM Ratio = (1,600,000 + 4,800,000) / 0.35 = 6,400,000 / 0.35 = $18,285,714.3
Part 3:
We can get it by comparing both the sales:
Part 4:
15% Commission
Contribution Margin EBIT 6,400,000 1,600,000
20% Commission
5,600,000 800,000
Self
7,600,000 475,000
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Part 5:
We would continue to use the sales agents for at least one more year, and possibly for two more years. The reasons are as follows: First, use of the sales agents would have a less dramatic effect on net income. Second, use of the sales agents for at least one more year would give the company more time to hire competent people and get the sales group organized. Third, the sales force plan doesnt become more desirable than the use of sales agents until the company reaches sales of $18,600,000 a year. This level probably wont be reached for at least one more year, and possibly two years. Fourth, the sales force plan will be highly leveraged since it will increase fixed costs (and decrease variable costs). One or two years from now, when sales have reached the $18,600,000 level, the company can benefit greatly from this leverage. For the moment, profits will be greater and risks will be less by staying with the agents, even at the higher 20% commission rate.
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