13-37

($)
Total Cost for Canoe Maintenance 18,300 = $2300+($2.50x6400)
Licenses and Permits 3,000
Vehicle Leases 5,400
Station Lease 6,920
Total Advertising Cost 9,200 = $6000+($0.5*6400)
Total Operating Cost 24,200 = $21000+(0.5*6400)
Total Life-Cycle costs 67,020

Fleet of 30 canoes 25,000

Total Assets 25,000

20% before-tax return = Net Profit Before Tax / Total assets

= Net Profit Before Tax / 25,000
Net Profit Before Tax = 0.2* 25,000
= 5000

Sales = Net Profit Before Tax + Total life-cycle cost

= $72,020

Sale price per rental = $72,020 / 6,400

= $11.25
Assumption: Depreciation of canoes has not yet occur, hence not factored into total life-cycle cost calculations

If depreciation were to be included -> 1 year of 2,500 depreciation -> 11.64 sales price per rental
13-48

Part 1 Kate made the decision purely based on gross profit alone. Kate should have considered other Additionally:
upstream and downstream activities such as research and development and selling expense

These costs may be substantial enough such that Xderm may not necessarily be the most
profitable.

Part 2 Xderm ($) Yderm ($) Total ($)

Sales 2,900,000 2,000,000 4,900,000
COGS (2,000,000) (1,500,000) (3,500,000)
Gross Profit 900,000 500,000 1,400,000
 R&D (600,000) = 0.75 x 800,000 (200,000) = 0.25 x 800,000 (800,000)
Selling Expenses (75,000) = 0.75 x 100,000 (25,000) = 0.25 x 100,000 (100,000)
Profit Before Tax 225,000 275,000 500,000
Return on Sales 7.76% 13.75%

Part 3 Kate has concluded

As a COO of the firm,that Xderm
Kate is theamore
has made profitable
wrong comment product despite
or come the product-line
to a wrong conclusionprofitability
regarding theanalysis suggesting
profitability otherwise.
analysis of the
products and
given that she is a senior management of the firm, she would be motivated to cover up her mistakes in front of her superiors. This
would result in
financial loss for the company in the future
Further, if Kate is an accountant, covering up her mistakes would be a breach of the code of professional ethics.

(Note that this qn is not really about Kate's vested interest, but more of the fact that she is a COO)
Total fixed costs = 800,000 + 100,000
= 900,000
Xderm variable cost = 2,000,000
Yderm variable cost = 1,500,000

Assumption: Given that we allocate the fixed costs based on sales revenue,
Xderm fixed cost = (2,900,000 / 4,900,000) x 900,000
= 532,653.06 (2 d.p.)
Yderm fixed cost = (2,000,000 / 4,900,000) x 900,000
= 367,346.94 (2 d.p.)
Xderm Profit before tax = 2,900,000 - 2,000,000 - 532,653.06
= 367,346.94
Yderm Profit before tax = 2,000,000 - 1,500,000 - 367,346.94
= 132,653.06
Xderm DOL = 900,000 / 367,346.94
= 2.45 (2 d.p.)
Yderm DOL = 500,000 / 132,653.06
= 3.77 (2 d.p.)

For Xderm, every 1% increase in revenue will lead to a 2.45% increase in operating income.
For Yderm, every 1% increase in revenue will lead to a 3.77% increase in operating income.

Hence, Yderm is actually more profitable than Xderm, assuming that fixed costs incurred can be proportionally
allocated to the products based on their sales revenues.
gtythe
analysis suggesting
profitability otherwise.
analysis of the
kes in front of her superiors. This

fessional ethics.
13-29

Part 1 A-10 A-25

Activity Usage Costing Rate ($) Cost ($) Activity Usage Costing Rate ($)
Direct materials - - 143.76 - -
Number of parts 121.00 2.25 + 2.55 580.80 92 2.25 + 2.55
Machine hours 6.00 23.50 141.00 4 23.50
Inspection time 1.00 35.00 35.00 0.6 35.00
Packing time 0.70 15.00 10.50 0.4 15.00
Setups 2.00 44.60 89.20 1 44.60
Total Product Cost ($) 1,000.26

Selling Price ($) 1,050.00

Less: Product cost 1,000.26
Product Margin ($) 49.74
Profit Margin 4.74%

Part 2 A-10 A-25

Activity Usage Costing Rate ($) Cost ($) Activity Usage Costing Rate ($)
Direct materials - - 78.65 - -
Number of parts 110.00 2.25 + 2.55 528.00 81.00 2.25 + 2.55
Machine hours 5.00 23.50 117.50 2.00 23.50
Inspection time 1.00 35.00 35.00 0.50 35.00
Packing time 0.70 15.00 10.50 0.20 15.00
Setups 1.00 44.60 44.60 1.00 44.60
Total Product Cost ($) 814.25

Selling Price 825.00

Less: Product cost 814.25
Product Margin 10.75
Profit Margin 1.30%
 Yes, BSI can make a positive gross margin with the new costs, assuming that it must meet the price set by the new competitor.

Part 3 Using Excel Goal Seek function (Data -> Data Tools -> Goal Seek),
we leave the cost for "number of parts" blank
and determine that this cost should be $488.75

Direct materials Number of parts Machine hours Inspection time Packing time Setups
78.65 488.75 117.5 35 10.5 44.6

Number of parts required = 488.75 / (2.25 + 2.55)

= 101 (round down to nearest whole number)
Number of parts to reduce = 110 - 101
=9

Part 4
Cost management method - The management should adopt Target Costing as the cost management method as this will allow them to determ

Specific solutions to use:

(1) Focus on more R&D to further reduce the number of parts required given that parts is a significant cost in the total product cost
(2) Capitalise on technology to further reduce machine time.
A-25
Cost ($)
66.44
441.6
94
21
6
44.6
673.64

725.00
673.64
51.36
7.08%

A-25
Cost ($)
42.45
388.80
47.00
17.50
3.00
44.60
543.35

595.00
543.35
51.65
8.68%
he new competitor.

Correction
Target Cell: Product Margin
Value to 50
Change value by: Number of parts

Revenue Costs Margin Activity Usage Costing Rate ($) Cost ($)
825 775 50 ---------> Direct materials - - 78.65
Number of parts 101.82 2.25 + 2.55 488.75
Machine hours 5.00 23.50 117.50
Inspection time 1.00 35.00 35.00
Packing time 0.70 15.00 10.50
Setups 1.00 44.60 44.60
Total Product Cost ($) 775.00

Selling Price 825.00

as this will allow them to determine if the actual costs incurred has exceeded Less:
th Product cost 775.00
Product Margin 50.00
Profit Margin 6.06%
al product cost
13-30

Part 1 Package Specifications Cancun Jamaica

Cost Data ($) Unit Cost ($) Unit Cost ($)
Oceanfront room; no of nights 30 6 180 4 120
Meals:
Breakfast 5 6 30 4 20
Lunch 7 7 49 5 35
Dinner 10 6 60 - -
Scuba diving trips 15 4 60 2 30
Water skiing trips 10 5 50 2 20
Airfare (round trip from Miami):
Cancun 175 1 175 - -
Jamaica 250 - - 1 250
Transportation to & from airport
Cancun 15 1 15 - -
Jamaica 10 - - 1 10
Total Cost ($) 619 485

Selling Price ($) 750 690

Profit ($) 131 205
Profit Margin 17.47% 29.71%

Part 2 Selling Price ($) 710 650

Profit ($) 91 165
Profit Margin 12.82% 25.38%

Take-a-Break can negotiate with the airline companies and hotels to get bulk discount to reduce cost. Additionally, g
college student trip, the company can downgrade the room offered from an Oceanfront room to a normal room sinc
Part 3 Recommendation 1: not need such a luxurious room
Recommendation 2: Take-a-Break can choose to partner with e-commerce market place (e.g Groupon) to offer special deals for these s

Recommendation 3:
Alternatively, Take-a-Break can reduce the number of water skiing trips for Cancun by 3 this will allow them to redu
achieve a profit margin of 17.04%. Whereas, reduce the number of Scuba diving trips and Water skiing trips for Jam
allow them to reduce cost by $25 and achieve a profit margin of 29.23%

Recommendation 4: Charge a reasonable baggage fee on customers so as to offset the current baggage costs incurred and to earn a p
educe cost. Additionally, given that this is a
om to a normal room since the students might
special deals for these students such that the costs for these trips can be reduced

s will allow them to reduce cost by $30 and

Water skiing trips for Jamaica by 1 this will

incurred and to earn a profit from providing this service.

9-39

Part 1 Unit CM = CM / Total units

= $262,500 / 12,500 units
= $21

Break-even quantity = Fixed Costs / Unit CM

= $296,100 / $21
= 14,100 units

Break-even sales = Break-even quantity x selling price

= 14,100 units x $84
= $1,184,400

Part 2 Target Sales (Unit) = (Fixed costs + Target profits before tax) / Unit CM
= ($296,100 + $30,000) / $21
= 15,529 units (rounded up)

Target Sales (Dollars) = Target Sales (Unit) x selling price

= 15,529 units x $84
= $1,304,400

Part 3 Target Profit before tax = $30,000 / 60%

= $50,000

Target Sales (Unit) = (Fixed costs + Target profits before tax) / Unit CM
= ($296,100 + $50,000) / $21
= $346,100 / $21
= 16,481 units (rounded up)

Target Sales (Dollars) = Target Sales (Unit) x selling price

= 16,481 units x $84
= $1,384,400

Part 4 Contribution Margin Income Statement

($'000)
Sales 1,384.40
Less: Variable Costs (1,038.30) (16,481 units x $63)
Contribution Margin 346.10
Less: Fixed Costs (296.10)
Net Profit before tax 50.00
Tax expense @ 40% (20.00)
Net Profit after tax 30.00
Part 5 Increase in fixed cost (advertising) ($60,000)
Increase in annual sales $200,000
Increase in variable costs ($150,000) (2,381 units x $63)
Net effect on operating profit or loss ($10,000)

Result in a further decrease of $10,000 in operating profit

Part 6 Increase in fixed cost (advertising) ($40,000)

Decrease in profit due to reduction in selling price ($105,000) ($84*0.1)*12,500
Increase in profit due to increase in sales volume $39,375 ($1,181,250 - $1,050,000)
Net effect on operating profit or loss ($105,625)

Result in a further decrease of $105,625 in operating profit

Part 7 Increase in fixed cost ($50,000)

Decrease in variable costs $62,500 ($5 x 12,500 units)
Net effect on operating profit or loss $12,500

Wise decision as the decrease in total variable costs outweight the increase in total fixed cost.
This generated cost savings & an increase in operating profit of $12,500.
 Increase in sales unit
$200,000 / $84 = 2,381 (rounded up)

Revised

50 - $1,050,000) Sales volume = 1.25 x 12,500 units = 15,625 units x

Annual sales $ 1,181,250

total fixed cost.

9-38
x
Part 1 Product Unit CM ($) Sales Mix
A 15 0.8
B 40 0.2
Total ($):

Break-even quantity = Fixed Costs / Weighted CM per unit

= $400,000 / $20
= 20,000 combined units

Of which:
Product A = 20,000 x 0.8
= 16,000 units

Product B = 20,000 x 0.2

= 4,000 units

Part 2 A's CM ($) B's CM ($) Weighted CM ($)

15 40 20

Goal Seek function

Set cell H21 Operating proft / (loss)
To value 0 (Profit = 0 as CM = Fixed Cost)
By changing cell E21 Breakeven quantity

Output 20,000

In order to derive break-even point, Jordan Inc. need to sell a combined 20,000 units of Product A

Part 3 Sales Basket Approach

Step 1: Determine no. of sales basket needed to achieve profit target (i.e. Profit target = 0, since breakev
Step 2: Convert no. of baskets to units of individual product based on composition of each sales basket

In 1 basket A B
Units Sold 4 1
CM / Unit 15 40
Contribution Margin 60 40

No. of Baskets required to achieve profit target of $0 (Breakeven)

Baskets = Fixed Cost / CM Basket
= 400,000 / 100
= 4,000 Baskets
 Of which:
Product A = 4,000 x 4 units
= 16,000 units

Product B = 4,000 x 1 unit

= 4,000 units

Part 4 Product Units Sold Selling price per unit ($)

A 18,000 80
B 4,500 140

(Unit CM / Unit Sales)

Product CM Ratio Sales Revenue Mix
A 18.75% 69.57%
B 28.57% 30.43%
Total:

Weighted CM Ratio = 21.74%

Break-even Sales (Dollars) = Fixed Cost / Weighted CM Ratio
= 400,000 / 21.74%
= $1,839,926 (nearest dollars)
Of which:
Product A sales = 69.57% x $1,839,926
= $1,280,037 (nearest dollars)
Product B sales = 30.43% x $1,839,926
= $559,889 (nearest dollars)

Part 5 In a multiproduct firm, the firm sells a variety of products and each product has different contribut
When sales mix changes, it affects the calculation of Weighted CM and Weighted CM Ratio. Since
CM ratio, changes in the latter will result in different break-even points. Hence, this is why the brea

Part 6 Revised fixed costs = 400,000 + 40,000

= $440,000
% increase in fixed cost = 440,000/400,000 - 1
= 10%
Breakeven Quantity = Fixed Costs / Weighted CM per unit
= 440,000 / 20
= 22,000 combined units
% change in breakeven quantity = 22,000/20,000 - 1
= 10%
The % change in the breakeven point equals to the % change in fixed costs. Since the % change in
an increase in fixed cost would require an increase in breakeven point of the exact magnitude.
 Weighted CM ($)
12
8
20

(weighted CM x breakeven quantity) (sales revenue - fixed cost)

Breakeven point (quantity) Sales Revenue ($) Fixed Cost ($) Operating profit / (loss)
20000 400000 400,000 -

ed 20,000 units of Product A & B.

Profit target = 0, since breakeven)

position of each sales basket

Total
5
55
100 Total combined CM
 Total Sales ($) Sales Revenue Mix
1,440,000 69.57%
630,000 30.43%
2,070,000

Weighted CM Ratio
13.04%
8.70%
21.74%

oduct has different contribution margin. Sales-mix refers to the proportion in which the firm's products are sold.
d Weighted CM Ratio. Since the computation of break-even point depends on either the Weighted CM or Weighted
s. Hence, this is why the break-even point of the firm is dependent on the sales mix.
costs. Since the % change in fixed costs do not affect the weighted-average contribution margin,
t of the exact magnitude.
 rm's products are sold.
Weighted CM or Weighted
9-46

Part 1
Current Manufacturing Costs ($)
Selling Price 100
Less: Variable Costs
Materials & Purchased parts 6.00
Direct Labor 12.50
Variable Overhead 25.00
General, Selling & Admin 10.00
Contribution Margin 46.50

Fixed Overhead 6,000,000

General, Selling & Admin (fixed) 1,250,000
Fixed Costs 7,250,000

Break-even Quantity = Fixed Costs / CM

= 155,914 units (nearest number)

Part 2 Let X be the no. of sales units such that CG would be indifferent to both plans
Equating (Fixed Costs + Variable Costs) LHS = RHS:
(100 - 46.50)x + 7,250,000 = (100 - 31.25)x + 4,250,000
53.5x + 7,250,000 = 68.75x + 4,250,000
15.25x = 3,000,000
x = 196,722 units (nearest number)

Part 3 Optimal Units Sold (point of indifference) 196,721

Current Plan
Variable Costs (10,524,590)
Fixed Costs (7,250,000)
Total Manufacturing Costs (17,774,590)
Cost Difference 0

Part 4 CG's core competency lies in that of being innovative in their product design
The industry is at an introductory stage and CG currently adopts a differentiation strategy which lever
Going forward, CG should continue to adopt a differentiation strategy as this would allow them to bett
 Volume of Units produced Total Manufacturing Costs under Current Plan
Part 5
50,000 9,925,000
75,000 11,262,500
100,000 12,600,000
125,000 13,937,500
Base Case: 150,000 15,275,000
175,000 16,612,500
200,000 17,950,000
225,000 19,287,500
250,000 20,625,000
275,000 21,962,500
300,000 23,300,000

Sensitivity Ana
300.0%

200.0%

100.0%
% variation from base case

0.0%
50,000 75,000 100,000 125,000 150,000 175,00

-100.0%

-200.0%

-300.0%

-400.0%

vOLUME OF UNITS

Based on our graph plotted, if CG believes that the volume of production would be lowered in the sho
then the new proposed plan should be adopted as it will result in higher cost-savings than in the base
However, given that CG's strategy and expectation is to sell > 150,000 units in the coming years, switc
would result in even higher manufacturing costs during production which would not be wise. Since th
in the coming years, then sticking to the current manufacturing costs would be better since it results
as compared to using the proposed reengineering plan

Based on the above computations, we can conclude that in the long-run, the current manufacturing pl
However, qualitative factors has to be evaluated as well since the tech industry is high risk and volatil
All in all, the company should evaluate all of the above factors and choose the decision that would inv
 Proposed Manufacturing Costs ($)
100

15.00
13.75
30.00
10.00
31.25

=(40*150,000) 3,000,000 =(20*150,000)

1,250,000
4,250,000

= Fixed Costs / CM
= 136,000 units (nearest number)

(Use Goal Seek)

Proposed Plan
(13,524,590)
(4,250,000)
(17,774,590)

ation strategy which leverages well on their core competency, allowing them to raise prices in the future for their differentiated pro
would allow them to better protect their market share and to maximise their profitability
 Total Manufacturing Costs
Difference (Current Plan - Proposed Plan) % Variation from Base Case
under Proposed Plan
7,687,500 2,237,500 214.0%
9,406,250 1,856,250 160.5%
11,125,000 1,475,000 107.0%
12,843,750 1,093,750 53.5%
14,562,500 712,500 0.0%
16,281,250 331,250 -53.5%
18,000,000 (50,000) -107.0%
19,718,750 (431,250) -160.5%
21,437,500 (812,500) -214.0%
23,156,250 (1,193,750) -267.5%
24,875,000 (1,575,000) -321.1%

Sensitivity Analysis

000 150,000 175,000 200,000 225,000 250,000 275,000 300,000

vOLUME OF UNITS SOLD

uld be lowered in the short-term,

-savings than in the base case scenario
n the coming years, switching to the new proposed plan
ould not be wise. Since they want to expand on their production
be better since it results in lower manufacturing costs

current manufacturing plan would be better

try is high risk and volatile. Further, the company has cash flow issues as well and another expenditure for a switch to the propos
he decision that would involve less risk being taken up.
r their differentiated products
a switch to the proposed plan may result in further cash outflows.
(a)(i) Senior Teacher
For Math course,
($)
Revenue 4,000.00 ($20 charge x 200 hrs)
Less : Variable costs
Teacher Salary (2,000.00) ($100 mkt rate x 200 hrs) / 10 students
Variable Utilities (200.00) ($0.10 x 100 sq meters x 200 hrs) / 10 students
Variable Copyright fee (10.00)
Printing cost (25.00) ($0.50 x 50 weeks)
2 salesperson bonus (80.00) 2 (0.01 x $20 charge x 200 hrs)
Contribution Margin 1,685.00

(a)(ii) Professional Master Teacher

For Math course,
($)
Revenue 8,000.00 ($40 charge x 200 hrs)
Less : Variable costs
Teacher Salary (5,600.00) ($280 mkt rate x 200 hrs) / 10 students
Variable Utilities (200.00) ($0.10 x 100 sq meters x 200 hrs) / 10 students
Variable Copyright fee (10.00)
Printing cost (25.00) ($0.50 x 50 weeks)
2 salesperson bonus (160.00) 2 (0.01 x $40 charge x 200 hrs)
Contribution Margin 2,005.00

(b) Fixed Costs :

Rental 162,000.00
Fixed Utilities 4,800.00
Utilities of office 37,000.00
Office supplies & cleaning 14,400.00
Salaries:
Receptionist 24,000.00
Accountant 42,000.00
Salespersons 72,000.00
Manager 48,000.00
Annual fixed copyright 140,000.00
Total Fixed Costs 544,200.00

(b)(i) Senior Teachers

Unit CM ($) Sales Mix
Math Course 1,685.00 5/ 9
English Course 2,560.00 4/ 9
Weighted average CM 2,073.89

Break-even Quantity 262.40557 263 (rounded up)

Of which:
Math Course 145.78087 150 (round up to nearest ten)
English course 116.62470 120 (round up to nearest ten)
=> 10 students per class
 For English course,
($)
Revenue 7,500.00 ($30 charge x 250 hrs)
Less : Variable costs
e x 200 hrs) / 10 students Teacher Salary (4,500.00) ($180 mkt rate x 250 hrs) / 10 students
sq meters x 200 hrs) / 10 students Variable Utilities (250.00) ($0.10 x 100 sq meters x 250 hrs) / 10 students
Variable Copyright fee (15.00)
Printing cost (25.00) ($0.50 x 50 weeks)
charge x 200 hrs) 2 salesperson bonus (150.00) 2 (0.01 x $30 charge x 250 hrs)
Contribution Margin 2,560.00

For English course,

($)
Revenue 12,500.00 ($50 charge x 250 hrs)
Less : Variable costs
e x 200 hrs) / 10 students Teacher Salary (10,000.00) ($400 x 250 hrs) / 10 students
sq meters x 200 hrs) / 10 students Variable Utilities (250.00) $(0.10 x 100 sq meters x 250 hrs) / 10 students
Variable Copyright fee (15.00)
Printing cost (25.00) ($0.50 x 50 weeks)
charge x 200 hrs) 2 salesperson bonus (250.00) 2 (0.01 x $50 charge x 250 hours)
Contribution Margin 1,960.00

(b)(ii) Professional Teachers

Weight CM ($) Unit CM ($)
936.11 Math Course 2,005.00
1,137.78 English Course 1,960.00
2,073.89
 Weighted average CM 1,985.00

Break-even Quantity 274.15617

Of which:
round up to nearest ten) Math course 152.77778
round up to nearest ten) English course 122.22222
nts per class
/ 10 students

/ 10 students

Sales Mix Weight CM ($)

5/ 9 1,113.89
4/ 9 871.11
1,985.00
 275 (rounded up)

160 (round up to nearest ten)

130 (round up to nearest ten)
=>10 students per class