QUESTION 4 (a)

Northenscold Company sells several products. Information of average revenue

and costs are as follows:

Selling price per unit Rs. 1340.00

Variable costs per unit:
Direct materials Rs. 268.00
Direct manufacturing labor Rs. 107.00
Manufacturing overhead Rs. 26.80
Selling costs Rs. 134.00
Annual fixed costs Rs. 6432000.000

1. Calculate the contribution margin per unit.

Rs. 1340 - Rs. 268 - Rs. 107 - Rs. 26.80 - Rs. 134 = Rs. 804.20

2. Calculate the number of units Northenscolds must sell each year to

break even.

Let the numer of units be X, then for break even

Total Revenue by selling Total Costs = 0
1340X 268X 107X 26.8X 134X 6432000 = 0;
804.2X = 6432000
X = 7998 units

3. Calculate the number of units Northenscolds must sell to yield a

profit of Rs 9648000/-.

Let the numer of units be Y, then for profit of a profit of Rs 9648000/-.

Total Revenue by selling Total Costs = Profit

1340X 268X 107X 26.8X 134X 6432000 = 9648000;
804.2X = 6432000 + 9648000
X = 1995 units

20X 8X 96,000 = $144,000; X = 20,000 units

Answer (b)
We know Debt Equity Ratio = Long-term debts .
Equity (Shareholders Funds)

Now,
In the given question
Total Debts = Rs 3,00,000

Current Liabilities = Rs 70,000

Total Liabilities = Total Debts + Current Liabilities

= Rs 3,00,000 + Rs 70,000 = Rs 3,70,000

Total Assets = Rs 5,40,000

Equity = Total Assets Total Liabilities

= Rs 5,40,000 Rs 3,70,000
= Rs 1,70,000

Thus, Debt-Equity Ratio = Rs 3,00,000 / Rs 1,70,000

= 1.7647
= 1.765

Explanation of break-even point:

The point at which total of fixed and variable costs of a business becomes equal to its total revenue is
known as break-even point (BEP). At this point, a business neither earns any profit nor suffers any
loss. Break-even point is therefore also known as no-profit, no-loss point or zero profit point.
 Explanation of the graph:

1. The number of units have been presented on the X-axis (horizontally) where as dollars have been presented on Y-axis (vertically).

2. The straight line in red color represents the total annual fixed expenses of $15,000.

3. The blue line represents the total expenses. Notice that the line has a positive or upward slop that indicates the effect of increasing variable expenses with the increase in production.

4. The green line with positive or upward slop indicates that every unit sold increases the total sales revenue.

5. The total revenue line and the total expenses line cross each other. The point at which they cross each other is the break-even point. Notice that the total expenses line is above the total

revenue line before the point of intersection and below after the point of intersection. It tells us that the business suffers a loss before the point of intersection and makes a profit after this point. The break-

even point in the above graph is 2,000 units or $30,000 that agrees with the break-even point computed using equation and contribution margin methods above.

6. The difference between the total expenses line and the total revenue line before the point of intersection (BE point) is the loss area. The loss area has been filled with pink color. Notice that

this area reduces as the number of units sold increases. It means every additional unit sold before the break-even point reduces the loss.

7. The difference between the total expenses line and the total revenue line after the point of intersection (BE point) is the profit area. The profit area has been filled with green color. Notice

that this area increases as the number of units sold increases. It means every additional unit sold after the break-even point increases the profit of the business.
 Solution:

Ending inventory in units:

Beginning inventory 600units

Purchases made during the month of July (800 + 700) 1,500units
-
Available for sale during the month of July 2,100units
Units sold during the month of July 1,400units
-
Ending inventory 700units
-

(1) First in, first out (FIFO) method:

Ending inventory:

700 units $27 = $18,900

Cost of goods sold (COGS):

600 units $20 $12,000

800 units $23 $18,400

Cost of goods sold (COGS) $30,400

OR

Cost of goods available for sale $49,300

Less ending inventory $18,900

Cost of goods sold (COGS) $30,400

(2) Last in, first out (LIFO) method:

Ending inventory:

600 units $20 $12,000

100 units $23 $2,300

$14,300

Cost of goods sold (COGS):

700 units $27 $18,900

700 units $23 $16,100

Cost of goods sold (COGS) $35,000

OR
Cost of goods available for sale $49,300
Less ending inventory $14,300

Cost of goods sold (COGS) $35,000

(3) If average cost method is used:

Weighted average cost per unit = $49,300/2100 units = $23.48

Ending inventory:

700 units $23.48 = $16,436

Cost of goods sold (COGS):

1,400 $23.48 = $32,864

OR

Cost of goods available for sale $49,300

Less ending inventory $16,436

Cost of goods sold (COGS) $32,864