Rift Valley University

Assignment on Cost and Management Accounting-II

1. Differentiate between fixed costs and variable costs.
2. Discuss how the total variable costs change when;
a. Volume of production increases.
b. Volume of production decreases.
3. Discuss what is meant by contribution margin.
4. Discuss what is meant by break-even point.
5. A wholesaler is a popular distributor specialized in selling one kind of household products in
the Midwest. The company's annual sales are Br500,000 and it annually sales 100,000 units.
Its annual fixed costs are Br120,000 and the annual variable costs are Br160,000.
a. Compute the contribution margin per unit
b. Compute the break-even sales volume
c. Compute the yearly margin of safety
Use the following information to answer questions 6-9
Jefferson Candies Inc. makes chocolate candies targeting children. The company makes
2,000,000 packets of Candy a year. Jefferson Candies' annual sales are Br6,000,000. The
following information was obtained from its internal financial statements for the past year.

manufacturing costs

Fixed Br400,000

Variable Br500,000

Other costs

Fixed Br350,000

Variable Br150,000
6. Calculate for the following:
a. Contribution margin per each packet of candy?
b. Contribution margin ratio?
7. What is the break-even sales volume?
8. What is the minimum price will the company charge per bag without incurring a loss?
9. How many packets of candy will Jefferson Candies sell in a year to make an income of Br3,
000,000?
10. Which action has a greater effect on the unit contribution margin: (1) increasing the unit
selling price by 10% or (2) reducing the unit variable cost by 10%?
11. In an article in the Wall Street Journal, you read that a firm reported a contribution margin
equal to 40% of revenues and profit equal to 15% of revenues. If fixed costs were Br200,
000, what were the firm’s revenues?
12. Ajay Singh plans to offer gift-wrapping services at the local mall during the month of
December. Ajay will wrap each package, regardless of size, in the customer’s choice of
wrapping paper and bow for a price of Br3. Ajay estimates that his variable costs will total
Br1 per package wrapped and that his fixed costs will total Br600 for the month.
Required:
a. Express Ajay’s profit before taxes in terms of the number of packages sold.
b. How many packages does Ajay need to wrap to break even?
c. How many packages must Ajay wrap to earn a profit of Br1,400?
13. From question number 12 above, we know that Ajay Singh’s gift-wrapping service charges
Br3 for each package wrapped. Ajay estimates that his variable costs will total Br1 per
package wrapped and that his fixed costs will total Br600 for the month.
Required:
a. Suppose Ajay’s variable costs were to increase by 50% per package. What is Ajay’s breakeven
sales volume?
b. Suppose Ajay estimates that he will be able to wrap 3,000 packages in a month. Assume also
that he wishes to earn Br2, 400 in profit for the month. What is the minimum price that Ajay
must charge to reach his profit goal?
c. How much profit would Ajay earn if December revenue were Br4,500 for the month
14. Body Sculpture, Inc., makes three models of high=performance weight-training benches.
Current operating data are summarized here:
Mega Muscle Power Gym Pro Force
Selling price per unit 280 400 580
Contribution margin per unit 84 154 116
Monthly sales volume-units 6,000 4,000 2,000
Fixed expenses per month Total of 1,280,000

REQUIRED:
a. Calculate the contribution margin ratio of each product.
b. Calculate the firm’s overall contribution margin ratio.
c. Calculate the firm’s monthly break-even point in sales dollars.
d. Calculate the firm’s monthly operating income.
e. Management is considering the elimination of the Pro Force model due to its low sales
volume and low contribution margin ratio. As a result, total fixed expenses can be reduced to
1,080,000 per month. Assuming that this change would not affect the other models, would you
recommend the elimination of the Pro Force model? Explain your answer.
f. Assume the same facts as in part e. Assume also that the sales volume for the Power Gym
model will increase by 1,000 units per month if the Pro Force model is eliminated. Would you
recommend eliminating the Pro Force model?
15. You contract an ABC Manufacturing Company to supply 6,000 units of its MVP. This would
also require 6,000 units of a component essential for the MVP. The estimated cost of
manufacturing these 6,000 units of the necessary component is roughly 234,000Br. The
direct material costs 10Br per unit, amounting to 60,000Br for 6,000 units, and direct labor
costs of 8Br per unit, totaling 48,000Br. Applied Variables Factory Overhead costs 9Br per
unit, totaling 54,000Br, and Applied Fixed Factory Overhead costs 12Br per unit totaling
72,000Br. There is also an additional 1.5Br direct labor at 39Br, capping the total costs at
234,000Br.
You can acquire the same component for 29Br per unit. Purchasing the component on the open
market will save 25% of the factories fixed overhead
Required: Should the company be make or buy the product

16. Assume a company is deciding between manufacturing a part in house that costs $26 per
unit, including direct cost, fixed overheads, and variable overheads, as given in the table
below.
 Cost Cost per Unit (Birr)
Direct Cost 15
Fixed Overhead 4
Variable Overhead 7
Total Cost 26
The same part is available in the market at Br23 per unit, including the cost of buying, shipping,
and warehousing, as shown in the table below.
Cost Cost Per Unit (Birr)
Cost of Part 20
Shipping and Warehousing Cost 3
Total Cost 23
Required: Should the Firm Make or Buy the part?
17. If Joraki Inc. receives a request for a special order to make 50,000 special pens for a
neighboring college for $0.30 per pen. The order is for only one month upon which the
college will have enough pens and surplus for its staff. The current cost of producing a pen
is $0.30 given the variable cost of $0.10 and the fixed cost of 0.20. Joraki Inc. sells its pens to
various wholesalers at $0.50 a pen. Currently, Joraki Inc. makes 400,000 pens a month and
its factory capacity is 500,000 pens a month.
Required: Do you think Joraki’s management should take the order or not?

18. Electroexperts Inc. has received a special marketing choice from one of the world's
electronic suppliers. The suppliers want to sell to Electroexperts Inc. a certain electronic
component for $18 per unit. Currently Electroexperts Inc. makes the part and its
management is seriously considering the buying choice.

Units manufactured 5,000

 Direct materials cost $30,000

Direct labor cost $40,000

Fixed costs $20,000

Variable costs $10,000

A. If Electroexperts Inc. buys the part, its fixed costs will reduce by 5% and the variable
costs will be scrapped off. Perform incremental analysis and determine whether
Electroexperts Inc. should buy the part or continue making the part?
B. If Electroexperts Inc. buys the part, its fixed costs will reduce by 60% and the variable
costs will reduce by 95%. Perform incremental analysis and determine whether
Electroexperts Inc. should buy the part or continue making the part?
19. ZapaKing Limited is a manufacturing company that makes three kinds of products. The
company is undergoing financial difficulties and the management have decided to scrap one
of its product lines. The monthly manufacturing costs of 1,000 units for each of the product
lines is given below. ZapaKing's selling prices for each of its products are: Product X= $97;
Product Y= $91; Product Z= $87.50.

Product X Product Y Product Z

Direct materials cost $50,000 $40,000 $35,000

Direct labor cost $20,000 $25,000 $30,000

Variable overhead $15,000 $10,000 $8,000

Fixed overhead $5,000 $6,000 $3,500
A. What is the unit cost for each of the product lines?
B. What is the profit per unit for each product line?
C. What is the contribution margin per unit of each of the three product lines?
D. Discuss what product line should be scrapped from ZapaKing's manufacturing lines?
20. Sopchoppy Company manufactures a red industrial dye. The company is preparing its 2000
master budget and has presented you with the following information. The December 31,
1999, balance sheet for the company is shown below.
SOPCHOPPY COMPANY
 Balance Sheet
December 31, 1999
Assets Liabilities and Stockholders’ Equity
Cash $ 5,080 Notes Payable $ 25,000
Accounts Receivable 26,500 Accounts Payable 2,148
Raw Materials Inventory 800 Dividends Payable 10,000
Finished Goods Inventory 2,104 Total Liabilities $ 37,148
Prepaid Insurance 1,200 Common Stock $100,000
Building $300,000 Paid-in Capital 50,000
Accumulated Depreciation (20,000) 280,000 Retained Earnings 128,536
1) Total Assets $315,684 Total Liabilities and Stockholders’ Equity $315,684
a. The Accounts Receivable balance at 12/31/99 represents the remaining balances of
November and December credit sales. Sales were $70,000 and $65,000, respectively, in
those two months.
2) Estimated sales in gallons of dye for January through May 2000 are shown below.
January 8,000
February 10,000
March 15,000
April 12,000
May 11,000
Each gallon of dye sells for $12.
3) The collection pattern for accounts receivable is as follows: 70 percent in the month of sale;
20 percent in the first month after the sale; 10 percent in the second month after the sale.
Sopchoppy expects no bad debts and no customers are given cash discounts. (continued)

4) Each gallon of dye has the following standard quantities and costs for direct materials and
direct labor:
1.2 gallons of direct material (some evaporation occurs during processing) @ $0.80 per gallon
$0.96 1/2 hour of direct labor @ $6 per hour 3.00
5) Variable overhead is applied to the product on a machine-hour basis. It takes 5 hours of
machine time to process 1 gallon of dye. The variable overhead rate is $0.06 per machine
 hour; VOH consists entirely of utility costs. Total annual fixed overhead is $120,000; it is
applied at $1.00 per gallon based on an expected annual capacity of 120,000 gallons. Fixed
overhead per year is composed of the following costs:
Salaries $78,000
Utilities 12,000
Insurance—factory 2,400
Depreciation—factory 27,600
Fixed overhead is incurred evenly throughout the year.
6) There is no beginning inventory of Work in Process. All work in process is completed in the
period in which it is started. Raw Materials Inventory at the beginning of the year consists of
1,000 gallons of direct material at a standard cost of $0.80 per gallon. There are 400 gallons
of dye in Finished Goods Inventory at the beginning of the year carried at a standard cost of
$5.26 per gallon: Direct Material, $0.96; Direct Labor, $3.00; Variable Overhead, $0.30; and
Fixed Overhead, $1.00.
7) Accounts Payable relates solely to raw material. Accounts Payable are paid 60 percent in
the month of purchase and 40 percent in the month after purchase. No discounts are given
for prompt payment.
8) The ending Finished Goods Inventory should be 5 percent of the next month’s needs. This is
not true at the beginning of 2000 due to a miscalculation in sales for December. The ending
inventory of raw materials should be 5 percent of the next month’s needs.
9) Selling and administrative costs per month are as follows: salaries, $18,000; rent, $7,000;
and utilities, $800. These costs are paid in cash as they are incurred.
Prepare a master budget for each month of the first quarter of 2000