Easy Living Industries is organized into three divisions: A, B and C. Data for these divisions for last year were as follows: A B C Production and sales in units 80,000 90,000 80,000 Average selling price per unit $16 $40 $30 Average variable manufacturing cost per unit $8 $19 $16.5 Fixed manufacturing overhead $500,000 Allocated to each division on the basis of units produced/sold. Local advertising expenses determined by the divisional managers $50,000 $60,000 $70,000 Sales commission (based on total sales) 4% 4% 4% Store manager salaries $600,000 No reasonable basis for the allocation of these expenses. Administrative expenses $350,000 Only $120,000 was traceable to the division C. Required: Prepare a profit statement for Easy Living Industries that highlights the performance of the three divisions and the performance of three divisional managers. Question 2 Fabulous Enterprises sells two products and has three customer groups. The selling prices and the manufacturing costs for the 2 products are as follows: P1 P2 Selling price per unit $60 $120 Variable manufacturing cost per unit $20 $30 The annual customer-driven activities and costs are as follows: Customer-driven activities Total activity cost Processing sales orders $24,000 Delivering the products $3,000 Sales calls $1,800 Handle customer complaints $19,200 Market research in Large customer $30,000 Advertising: small 1/3; Medium 2/3 $3,000 The number of customer activities as per the three customer groups are as follows: Small Medium Large Number of customers 1000 2000 3000 Sales units – P1 500 400 300 Sales units – P2 100 200 300 Number of sales orders 70 80 90 Number of deliveries 15 20 25 Number of sales calls 10 20 30 Number of customer complaints 100 50 10 Required: Should Fabulous Enterprises Ltd continue to sell to all customer groups? Prepare an income statement that shows the profitability of the three customer groups. Question 3 Black Hills Ltd purchased a machine 4 years ago. The management is considering purchasing of a new machine. The company has two options: Continue to operate the old machine Sell the old machine and purchase the new machine Under each option, the expected revenue is likely to remain the same: the company expects to sell 300,000 boxes of biscuits at $1.15 per box for the next 6 years. The following information has been compiled to help management decide which option is more desirable: Old machine New machine Original cost at the time of acquisition $80,000 $120,000 Remaining useful life 6 years 6 years Expected annual operating expenses $0.38 per box $0.29 per box Expected annual fixed expenses $21,000 $11,000 Estimated cash value of machines End of year 6 $7,000 $20,000 Taxation depreciation Has been fully claimed 20% per annum using the straight-line method Accounting depreciation Straight-line method Straight-line method Investment allowance in Year 1 – 10% If the new machine is purchased, arrangements will be made to sell the old machine. The old machine is expected to be sold for $40,000. It is assumed that all expenses will be paid in cash each year. It is assumed that all cash flows occur at the end of each year. The company’s income tax rate is 40%. The company has an after-tax required rate of return of 12% (see the attached tables). Required: Should High Hill Ltd retain the old machine or acquire the new machine? Answer on the basis of your calculations. Calculate the following, the after-tax: a.Net present value under both options b.Accounting rate of return for the new machine. Question 4 Steven Ltd sells two models: A1 and A2. The models’ production and sales data is as follows: A1 A2 Current production and sales 1,000 units 3,000 units Batch size 500 300 Selling price per unit $300 $400 Number of direct on-line customers 20 30 Direct materials per unit $130 $120 Direct labour per unit $50 $100 Variable overhead per unit $20 $35 Variable selling cost per unit $5 $5 Fixed overhead cost per unit $40 $50 Inspection cost per batch $60 $60 Customer-level costs $100 per customer $100 per customer Production and process design $2,000 per model $3,500 per model Currently, the sales staff is paid a flat salary amounting to $75,000 per year. The fixed manufacturing overhead is $36,000 per year. Steven Ltd’s objective is to earn high profit and keep the sales staff motivated. The company is keen to arrive at a decision will meet both criteria. The management is considering a change to a performance-based system. The following plan is being considered: Expected production and sales 5,000 units Expected new batch size for each model 500 Expected new sales mix A1:80% A2:20% Expected staff commission 30% commission calculated on the basis of production contribution margins Expected total number of customers Increase by 20% Expected cost per customer $200 All other data remains the same. Required: a.Assuming the current sales mix, determine the break-even point for each model. b.Given Steven Ltd’s objective, what do you recommend? Should the company implement the plan? Explain and show all supporting calculations. Question 5 The following data is provided by Murray Ltd for product P1: Direct materials per unit $120 Direct labour hours per unit 2 Cost per direct labour hour $40/hour Allocated fixed selling and administrative cost 75 Variable manufacturing overhead per unit 100 Applied fixed manufacturing cost 105 Variable selling and administrative cost 45 Required: a.For each of the following, develop cost-plus pricing formulas that will result in a price of $500 for one unit of P1: Absorption product cost Variable product cost b.Identify the advantages and disadvantages that can result when cost-plus prices are based on the above two definitions of cost. Question 6 Harry Ltd manufactures two products: C1 and C2 Last month, 1,000 units of material costing $12,000 was processed at a cost of $36,000. The joint production process resulted in 15,000 kilograms of C1 and 10,000 kilograms of C2. C1 sells for $2 per kilogram and C2 sells for $3 per kilogram. Required: Allocate the company’s joint production costs for the month using: a.Constant gross margin method b.The company is considering if C2 should be processed further to produce C3. The additional processing costs will be $0.75 per kilogram and C3 will sell for $4 per kilogram. Explain whether C2 should be processed into C3? Show all calculations. c.Assume that C2 is processed into C3 and 1000 kilograms are spoilt in that process. Use the net realizable value method to allocate the joint production costs to C1 and C3.
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