10-Sep-15

Solution

Trial final exam 2015 – V1

Task 1
a) Total Unit
Revenue 105,000 30
Variable expenses 94,500 27
Direct materials 31,500 9
Direct labor 24,500 7
Manufacturing overhead 14,000 4
Selling and administrative overhead 24,500 7
Contribution margin 10,500 3
Fixed expenses 16,000
Manufacturing overhead 10,000
Selling and administrative overhead 6,000
Income (loss) (5,500)

1
 10-Sep-15

Task 1
b) Knowledge of cost behavior allows a manager
to assess changes in costs that result from
changes in activity. This allows a manager to
examine the effects of choices that change
activity.
Knowing what costs are variable and what costs
are fixed can help a manager make better cost
prediction and, ultimately, better business
decisions.

Task 2
a) The costs that can be avoided as a result of
purchasing from the external party are relevant in a
make-or-buy decision. The analysis is as follows:
Make Buy
Direct materials 108,000
Direct labour 300,000
Variable manufacturing overhead 72,000
Avoidable fixed manufacturing overhead 90,000
Opportunity cost 80,000
Cost of purchasing 630,000
Total relevant costs 650,000 630,000

2
 10-Sep-15

Task 2
b) Advantages of producing own parts:
1 – less dependent on supplier, therefore able to ensure
a smoother flow of parts and materials for production
2 – can control quality better by producing own parts
and materials
3 – can remain jobs for workers, avoiding laying-off
workers which may harm the company’s reputation.

Task 3
a) i) September production = 3,000 units. Gasket should
been used in production = SQ = 3,000 x 6 = 18,000
gaskets.
MPV = AQpurchased*(AP – SP) = 25,000 *(0.48 - 0.50) =
500 (F)
MQV = SP*(AQused – SQ) = 0.50*(20,000 – 18,000) =
1,000 (U)
a) ii) LRV = AH*(AR – SR) = 4,000*(9 - 8) = 4,000 (U)
LEV = SR*(AH – SH) = 8*(4,000 – 3,900) = 800 (U)

3
 10-Sep-15

Task 3
b) Some of the other possible explanations for the
variances observed appear below:
• Favorable MPV: (1) purchase of a lower grade
material at a discount, (2) buying in an unusually
large quantity to take advantage of quantity
discounts, (3) a change in the market price of the
material, (4) or particularly sharp bargaining by the
purchasing department.
• Unfavorable MQV: (1) poorly trained or supervised
workers, (2) improperly adjusted machines, and (3)
defective materials.

Task 3
• Unfavorable LRV: (1) an increase in wages that has
not been reflected in the standards, (2)
unanticipated overtime, and (3) a shift toward more
highly paid workers.
• Unfavorable LEV: (1) poor supervision, (2) poorly
trained workers, (3) low-quality materials requiring
more labour time to process, and machine
breakdowns.

4
 10-Sep-15

Task 4
a) The first proposal reduces the company’s net income
by $2,300
Sales with
Current sales Difference
advertising budget
Sales 180,000 189,000 9,000
Variable expenses 126,000 132,300 6,300
Contribution margin 54,000 56,700 2,700
Fixed expenses 30,000 35,000 5,000
Income 24,000 21,700 (2,300)

Task 4
b) The $2 increase in variable cost will cause the unit
contribution margin to decrease from $27 to $25 with the
following impact on net operating income:

Expected contribution margin with

higher grade cocoa bean (2,200 x 25)………….............55,000
Present total contribution margin (2,000 x 27)………..54,000
Change in total contribution margin………………………..$1,000

The second proposal increases income by 1,000

5
 10-Sep-15

Task 4
c) Choose the second proposal. Assuming other factors
are constant, the first proposal will result in reduction
in income of $2,300, whilst the second proposal will
result in an increase in income of $1,000.

Task 5

Jan Feb Mar Total

Budgeted sales 100,000 125,000 150,000 375,000

Collection from Jan sales 68,600 20,000 6,000 94,600

Collection from Feb sales - 85,750 25,000 110,750
Collection from Mar sales - - 102,900 102,900
Total collections 68,600 105,750 133,900 308,250