**Cost and Management Accounting II**

**Work sheet –chapter 1**

1. B Ltd manufactures a single product which it sells for £9 per unit. Fixed costs are £54,000 per month and the product has a variable cost of £6 per unit. In a period when actual sales were £180,000, B L td’s margin of safety, in units, was:

2. An organization currently produces one product. The cost per unit of that product is as follows: Total fixed costs for the period amount to £1,600,000. How many units (to the nearest whole unit) will the organization need to produce and sell to generate a profit of £250,000?

3. OT Ltd plans to produce and sell 4,000 units of product C each month, at a selling Price of £18 per unit. The unit cost of product C is as follows:

Per unit Variable cost $ 8

Fixed cost 4 $ 12

To the nearest whole number r, the monthly margin of safety, as a percentage of planned sales is_______%.

4. Green thumb makes small plant stands that sell for $25 each. The company’s annual level of production and sales is 120,000 units. In addition to $430,500 of fixed manufacturing overhead and $159,050 of fixed administrative expenses, the following per-unit costs have been determined for each plant stand:

Direct material $ 6.00 Direct labor 3.00 Variable manufacturing overhead 0.80 Variable selling expense 2.20

Total variable cost $12.00 Required:

B. Calculate the unit contribution margin in dollars and the contribution margin ratio for a plant stand.

C. Determine the break-even point in number of plant stands.

D. Calculate the dollar break-even point using the contribution margin ratio.

E. Determine Green thumb’s margin of safety in units, in sales dollars, and as a percentage. F. How many plant stands must the company sell to earn $996,450 in before-tax income? G. If the company wants to earn $657,800 after tax and is subject to a 20 percent tax rate,

how many units must be sold?

H. How many plant stands must be sold to break even if Green thumb’s fixed manufacturing cost increases by $7,865? (Use the original data.)

I. The company has received an offer from a Brazilian company to buy 4,000 plant stands at $20 per unit. The per-unit variable selling cost of the additional units will be $2.80 (rather than $2.20), and $18,000 of additional fixed administrative cost will be incurred. J. Is sale would not affect domestic sales or their cost. Based on quantitative factors alone,

should Green thumb accept this offer?

5. Diamond Jim’s makes and sells class rings for local schools. Operating information is as follows:

Selling price per ring $600

Variable cost per ring

Rings and stones $220

Sales commissions 48

Overhead 32

Annual fixed cost

Selling expenses $180,000

Administrative expenses 105,000

Manufacturing 60,000

a. What is Diamond Jim’s break-even point in rings?

c. What would Diamond Jim’s break-even point be if sales commissions increased to $54?

d. What would Diamond Jim’s break-even point be if selling expenses decreased by $6,000?

6. Seattle Leisure Designs has designed a new athletic suit. h e company plans to produce and sell 30,000 units of the new product in the coming year. Annual fixed costs are $600,000, and variable costs are 70 percent of selling price. If the company wants a pre-tax profit of $300,000, at what minimum price must it sell its product?

7. Sheridan Shacks makes portable garden sheds that sell for $1,800 each. Costs are as follows:

Per Unit Total

Direct material $800

Direct labor 90

Variable production overhead 60

Variable selling and administrative cost 50

Fixed production overhead $200,000 Fixed selling and administrative 60,000

Use the information for Sheridan Shacks in Exercise 15 and assume tax rate for the company of 35 percent.

A. If Sheridan Shacks wants to earn an after-tax profit of $182,000, how many garden sheds must it sell?

B. How much revenue is needed to yield an after-tax profit of 8 percent of revenue? How many garden sheds does this revenue amount represent?

8. Mel’s Male Accessories sells wallets and money clips. Historically, the firm’s sales have averaged three wallets for every money clip. Each wallet has an $8 contribution margin, and each money clip has a $6 contribution mar-gin. Mel’s incurs fixed cost in the amount of $180,000. The selling prices of wallets and money clips, respectively, are $30 and $15. The corporate-wide tax rate is 40 percent.

a. How much revenue is needed to break even? How many wallets and money clips does this represent?

c. How much revenue is needed to earn an after-tax profit of $150,000?

d. If Mel’s earns the revenue determined in (b) but does so by selling five wallets for every two money clips, what would be the pre-tax profit (or loss)? Why is this amount not $150,000?

9. Data for Hermann Corporation are shown below: Per Unit Percent of Sales Selling price ...$90 100% Variable expenses ... 63 70 Contribution margin ... $27 30 %

Fixed expenses are $30,000 per month and the company is selling 2,000 units per month. Required:

1. The marketing manager argues that a $5,000 increase in the monthly advertising budget would increase monthly sales by $9,000. Should the advertising budget be increased?

2. Refer to the original data. Management is considering using higher-quality

components that would increase the variable cost by $2 per unit. The marketing manager believes the higher-quality product would increase sales by 10% per month. Should the higher-quality components be used?

10. Menlo Company distributes a single product. The company’s sales and expenses for last month follow:

Total Per Unit

Sales ... $450,000 $30

Variable expenses ... 180,000 12

Contribution margin ... 270,000 $18

Fixed expenses ... 216,000

Net operating income ... $ 54,000

Required:

A. What is the monthly break-even point in units sold and in sales dollars?

C. How many units would have to be sold each month to earn a target profit of $90,000? Use the formula method. Verify your answer by preparing a contribution format income statement at the target sales level.

D. Refer to the original data. Compute the company’s margin of safety in both dollar and percentage terms.

E. What is the company’s CM ratio? If sales increase by $50,000 per month and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?