Management accounting iii

Tutorial 2

Q1. What are some different managerial uses of cost information? ( 3-1, pg
121 )

The uses of cost information is pervasive throughout decisionmaking situations.

Pricing, organizations use cost information in the pricing
decision in two ways. In markets where the organization faces a
market-determined price, the organization will use product cost
information to decide whether its cost structure will allow it to
compete profitability. For markets where the organization can set
its price, organizations will often set a price that is an increment
of its product cost. This approach is known as cost plus pricing.

 Product Planning, organizations use a tool called target

costing to focus efforts in product and process design on
developing a product that has a good profit potential in view
of market requirements.
Budgeting, the most widespread in used, which is a
management accounting tool that projects or forecasts costs
for various level of production and sales activity. Budgets are
important in planning, which sets the organizations direction
for the budget period. It provide the basis for earnings
forecasts that senior executives issue to the stock market.
Performance Evaluation, managers compare the actual
results from the budget period with expectations that were
reflected in the budget to assess how well the organization did
in light of its expectations.

Q1. Why should decision makers focus only on the relevant

costs for decision making? ( 3-9, pg 121 )

This is because relevant costs are those future costs

and revenues that will be changed due to a result of
some decisions.
By focusing only on relevant cost, it can reduce
distraction to the decision maker.

Q2. Patterson Parkas Companys sales revenue is $50 per

unit, variable costs are $30 per unit, and fixed costs are
$180,000. ( 3-28, pg 123 )
Required
a. Compute Pattersons contribution margin per unit and
contribution margin ratio.
$
Sales Revenue

50

Variable costs

30

Contribution margin

20

Contribution margin ratio = 20/50 x 100%

= 40%

Required
b. Determine the number of units Patterson must sell to break
even.
$
Sales Revenue

50

Variable costs

30

Contribution margin

20

Breakeven point = fixed cost / contribution

= $180,000 / $20
= 9,000 units

Required
c. Determine the sales revenue required to earn (pretax) income
equal to 20% of the revenue.

Target sales (value) = FC + Profit / Contribution margin ratio

x

= $180,000 + 0.2x / 0.4

0.4x = $180,000 + 0.2x

0.2x = 180,000
x = $ 900,000

Required
d. How many units must Patterson sell to generate an after-tax
profit of $120,000 if the tax rate is 40% ?
Profit before tax = 120,000/ (1-0.4)
= $200,000
Target sales (unit)
= 180,000 + 200,000/ $20
= 19,000 units
No. of units = $380,000 / $20
= 19,000 units

Required
e. Patterson is considering increasing its advertising expenses by
$40,000. how much of an increase in sales units is necessary
from expanded advertising to justify this expenditure
(generate an incremental contribution margin of $40,000) ?
Increase

in Sales units =
= $ 40,000 / $ 20
= 2,000 units

Q3) 3-31
Florida Favourites Company produces toy allogator and
toy dolphins. Fixed costs are $1,290,000 per year. Sales
revenue and variable costs per unit are as follow:
Alligator
Dolphin
Selling price
$20
$25
Variable costs
8
10

(a) Suppose the company currently sells 140,000 alligators

per year and 60,000 dolphins per year. Assuming the sales
mix stays constant, how many alligators and dolphins must
the company sell to break even per year?
a)

Alligator

Dolphin

Total

Unit sold per year

140,000

60,000

200,000

0.7

0.3

Ratio

Selling price

$20

$14

$25

$7.5

$21.5

Variable costs

5.6

10

8.6

Contribution margin

12

8.4

15

4.5

12.9

(b) Suppose the company currently sells 60,000 alligators per year
and 140,000 dolphins per year. Assuming the sales mix stays
constant, how many alligators and dolphins must the company sell
to break even per year?
b)

Alligator

Dolphin

Total

60,000

140,000

200,000

0.3

0.7

Unit sold per year

Ratio
Selling price

$20

$6

$25

$17.5

$23.5

Variable cost

2.4

10

9.4

Contribution margin

12

3.6

15

10.5

14.1

c) Explain why the total number of toys needed to break

even in part (a) is the same as or different from the
number in part (b).
Answer:
The total number of toys needed to break even from
both part is different because of the sales mix. Total
contribution margin in part (b) ($14.1) is higher than
part (a) ($12.90) and thus result in different break even
units.

(Q4) 3-33
Healthy Hearth specializes in lunches for
health-conscious people. The company
produces a small selection of lunch offerings
each day. The menu selections vary from day
to day, but Healthy Hearth charges the same
price per menu selection because it adjusts the
portion sizes according to the cost of
producing the selection. Healthy Hearth
currently sells 5,000 meals per month.

A government agency has recently proposed

that Healthy Hearth provide 1,000 meals next
month for senior citizens at $3.50 per meal.
Volunteers will deliver the meals to the senior
citizens at no charge.
(a) Suppose Healthy Hearth has sufficient idle
capacity to accommodate the government
order for next month. What will be the impact
on Healthy Hearths operating income if it
accepts this order?

a) Contribution margin per meal = $3.50 - $3

= $0.50
Additional operating income = $0.50 x 1000
= $ 500

(b) Suppose that Healthy Hearth would have to

give up regular sales of 500 meals, at a price
of

$4.50

each,

to

accommodate

the

government order for next month. What will

be the impact on Healthy Hearths operating
income if it accepts the government order?

b)
Opportunity cost : 500 meals @ $4.50 per meal
Contribution margin per meal = $4.50 - $3
= $1.50
Reduction in operating income
= $750
Loss in operating income
= $200

= $1.50 x 500

= $500 - $750

Q5. 3-36
a) List out the relevant costs:
Old Grinding Machine:
Current salvage value
RM6,000
New Grinding Machine:
Cost
RM60,000
Annual operating costs
RM8,000
Overhaul of Old Grinding Machine:
Cost of overhaul
RM35,000
Annual operating cost after overhaul
RM13,000

b) Which is the sunk costs?

Original cost of the machine

Accumulated depreciation
Annual operating costs

RM60,000
RM48,000
RM20,000

c) What should the plant manager do?

Costs
Annual operating
costs:
-$8000 x 5 Years
-$13000 x 5 Years
Current salvage value

Buying an new
machine

Overhaul the old

machine

$60,000

$35,000

$40,000
$65,000
($6,000)

$96,000

$100,000

Since the cost of overhaul the old machine is more

expensive than buying an new machine, thus the plant
manager should buy a new machine.

Q6. 3-38
a)
Smartphone
($140 x 50000 units)
Components:
Internal : $35 x 50000 units

Make

Buy

7,000,000

7,000,000

1,750,000

Outsource $34 x 50000 units

Total relevant cost (take the

lowest)

1,700,000

8,750,000

8,700,000

b)
Smartphone
($140 x 50000 units)
Components:
Internal : $30 x 50000 units

Make

Buy

7,000,000

7,000,000

1,500,000

Outsource $34 x 50000 units

Total relevant cost (take the
lowest)

1,700,000
8,500,000

8,700,000

Q7 3-49 (pg.130)

Fixed Cost
Sales staff salaries
Office & showroom
rental
Depreciation on
carpentry equipment

RM

Variable Cost

80,000 Carpenter labor

150,000 Wood to make the
shelves
50,000 Sales commission
based on units sold

Advertising

200,000 Miscellaneous variable

O/H

Miscellaneous fixed
O/H

150,000 Total Variable Cost

Rent for building

300,000

Depreciation for office

equipment
Total
contribution Fixed

10,000 Variable cost per unit

Unit need to be sold =

Cost = Net Profit

Total Fixed
Cost
940,000
(SP-VC)x
940,000
= 500,000
(70-31.6)x 940,000 =
500,000
38.4x = 1,440,000

=
= 37,500 units

RM
600,000
450,000
180,000
350,000
1,580,0
00
=15800
00/5000
0
=31.60

Q8 3-57 (pg.133)
(a) Practical capacity profit
=(SP-VC)2000chips FC
=($500-$450)2000 $75,000
=$25,000
(b) Estimate change in profit
=($480-$450) * 200chips
= $6,000
(c)
New order profit

(480-450)*600chips

$18,000

Opportunity cost

(500-450)*200

-$10,000

Net increase

$8,000