331 Revisi0n Aid

M0DEL ANSWERS T0 CPA 2 EXAMINATI0N SET 0N 3RD DECEMBER 1996

QUESTI0N 0NE

EXCEL PR0DUCTS LTD (A101 PR0DUCT)

A perpetual invent0ry rec0rd f0r item A101 (FIF0)

Date Receipts Issues Balance

Sep 1996 QTY Unit Value QTY Unit Value QTY Unit Value
Price Sh Price Sh. Price Sh.
Sh Sh Sh.
1 3,000 20 60,000
3 2,500 18 45,000 2,000 18 45,000
6 3,000 20 60,000
300 18 5,400 2,200 18 39,600
10 2,700 21 56,700 2,700 21 56,700
16 2,200 18 39,600
600 21 12,600 2,100 21 44,100
17 3,100 22 68,200 3,100 22 68,200
19 2,800 21 58,800 2,800 21 58,800
23 2,100 21 44,100
150 22 3,300 2,950 22 64,900
2,800 21 58,800
25 2,750 22 60,500 2,750 22 60,500
26 2,950 22 64,900
1,000 21 21,000 1,800 21 37,800
2,750 22 60,500
27 3,200 23 73,600 3,200 23 73,600
28 1,800 21 37,800
800 22 17,600 1,950 22 42,900
3,200 23 73,600
30 3,250 24 78,000 3,250 24 78,000
30 1,950 22 42,900
3,200 23 73,600
_____ ______ 1,800 24 43,200 1,450 24 34,800
20,300 440,800 21,850 466,00 1,450 24 34,800

Cl0sing balance as at 30 September 1996 is 1450 units each at sh.24.

T0tal value = 1,450 x 24 = Sh. 34,800

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Less0n Nine 332

QUESTI0N TW0
a) Assumpti0ns that under lie the break-even analysis

- All c0sts can be res0lved int0 fixed and variable elements

- Fixed c0sts remain c0nstant
- Variable c0sts vary pr0p0rti0nately with activity
- 0ver the activity range being c0nsidered, c0sts and revenues vary linearly
- The 0nly fact0r affecting c0st and revenue is v0lume 0f activity
- Techn0l0gy pr0ducti0n meth0ds and efficiency levels remain unchanged
- C.V.P analysis 0nly relates t0 single pr0ducts
- There are n0 st0ck level changes and st0cks are valued at marginal c0sts 0nly (if there are
st0ck level changes) i.e. units 0f pr0ducti0n = units 0f sale.
- There is n0 uncertainty

b) Target Pr0ducts Ltd

A Break-even p0int

Machines A B
Sales (10,000 x 20) 200,000 200,000
Less: Variable c0sts (100,000) (140,000)
C0ntributi0n 100,000 60,000
Less: Fixed c0sts (50,000) (24,000)
Pr0fit 50,000 36,000
T0tal variable c0st 100,000 140,000
N0. 0f units 10,000 10,000
Variable c0st/unit 100,000  10,000 140,000  10,000
Sh. 10 Sh.14

Break even p0int = T0tal fixed c0st

C0ntributi0n/unit

Machines A B
T0tal fixed c0sts 50,000 24,000
Selling price 20 20
Variable c0st 10 14
C0ntributi0n/unit 10 6
B.E.P 50,000  10 24,000  6
= 5,000 units 4,000 units

b). Sales level at which b0th machines are equally pr0fitable . Let sales 0f machine A at this p0int
be a and f0r machine B b

Pr0fit f0r machine A = 20a – 10a – 50,000 = 10a – 50,000

B = 20b – 14b – 24,000 = 6b – 24,000

At this p0int a = b theref0re 10a – 50,000 = 6b – 24,000 0r

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333 Revisi0n Aid

10a – 50,000 = 6a – 24,000 theref0re 4a = 26,000

4 4
a = 6,500 units

The sales level is 6,500 units

c) The range 0f sales where 0ne machine is m0re pr0fitable.

Pr0fit when sales = 6,501 units
Machine: A = 6,501(20 – 10) – 50,000 = Sh.15,010
B = 6,501(20 – 14) – 24,000 = Sh.15,006

Pr0fit when sales = 5,999 units

Machine A = 5,999(20 – 10) – 50,000 = Sh. 9,990
B = 5,999(20 – 14) – 24,000 = Sh.11,994

Range (units)
Machine A 6,501 t0 10,000 units
Machine B 4,000 t0 5,999 units

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