Subject: Strategic Business Analysis

Assignment 1.

1. Customer profitability Analysis.

Base Ltd. Manufactures gadgets. It has been ascertained that the market for gadgets is as follows:
*at unit price P20, no gadgets are demanded or sold;
*at unit price nil, 5,000 gadgets are demanded;
*for price levels intermediate between P20 and nil there is a linear relationship between price and demand.

The variable cost of manufacturing a gadget is P5 at all levels of output.

Required: Calculate the unit selling price which will”

a. Maximize revenue = P12 and P8
b. Maximize profit = P12

Solutions:
A an B. An interval of P4

Selling Price P20 P16 P12 P8 P4 P0

Sales in units 0 1,000 2,000 3,000 4,000 5,000
Revenue (SP x units) P0 P16,000 P24,000 P24,000 P16,000 P0
Less: VC (VC x units) 0 5,000 10,000 15,000 20,000 25,000
Profit P0 P11,000 P14,000 P 9,000 P(4,000) (25,000)

2. Backflush costing. Jona Company uses just-in-time philosophy in its inventory activities. The following information
relative to its product, King, for June 2022 production is made avaible:
Standard cost per unit
Direct materials, 4lbs. @ P10 P40.00
Conversion costs:
Direct labor, 3 hrs. @P40 120.00
Factory overhead, 3 hrs. @P20 60.00

Actual data:
Production, 20,000 units
Materials purchases, 84,000 lbs. x P10 = P840,000
Payroll, 59,000 hrs. @ P41 = P2,419,000
Other conversion costs, P1,239,000
Total conversion costs = P1,239,000 + P2,419,000=P3,658,000

Required. Prepare the journal entries to record the cost of materials and conversion costs using the backflush costing
system assuming the backflush point is:
a. the point of sale
b. point of production
c. point of receipt and point of sales
d. point of receipt and point of production
Solution:
A. Point of Sale
Transactions Accounts Dr. Cr.
a. Raw materials purchases No entry

b. Incurrence of conversion costs Conversion costs 3,658,000

Accounts payable, etc 3,658,000

c. Finished goods completed No entry

d. Sale of goods to customers, Cost of goods sold 4,498,000

Materials are backflushed to Conversion costs 3,658,000
Cost of goods sold Accounts payable 840,000

b. point of production

Transactions Accounts Dr. Cr.

a. Raw materials purchases No entry

b. Incurrence of conversion costs Conversion costs 3,658,000

Accounts payable, etc 3,658,000

c. Finished goods completed. Finished goods 840,000

Materials are backflushed to Accounts payable 840,000
Finished goods

d. To close conversion costs to Cost of goods sold 3,658,000

of goods sold Conversion costs 3,658,000

e. Transfer of finished goods to Cost of goods sold 840,000

Cost of goods sold Finished goods 840,000\

c. point of receipt and point of sales

Transactions Accounts Dr. Cr.

a. Raw materials purchases Raw and in process 840,000
Accounts Payable 840,000

b. Incurrence of conversion cost Conversion costs 3,658,000

Accounts payable, etc 3,658,000

c. Finished goods completed. No entry

d. Materials are backflushed to Cost of goods sold 840,000

Cost of goods sold Raw and in process 840,000

d. To close conversion costs to Cost of goods sold 3,658,000

of goods sold Conversion costs 3,658,000
d. point of receipt and point of production
Transactions Accounts Dr. Cr.
a. Raw materials purchases Raw and in Process 840,000
Accounts Payable 840,000

b. Incurrence of conversion costs Conversion costs 3,658,000

Accounts payable, etc 3,658,000

c. When goods are completed, the Finished goods 840,000

Materials are backflushed to the Raw and in Process 840,000
Finished goods inventory with its cost

d. To close conversion costs to Finished goods 3,658,000

Finished goods inventory Conversion costs 3,658,000

e. Transfer of finished goods to Cost of goods sold 4,498,000

Cost of goods sold Finished goods 4,498,000

3. Activity-based costing.
Zeila Company is preparing its annual profit plan. As part of its analysis of the profitability of individual products, the
controller estimates the amount of overhead that should be assigned to the individual product line from the information
given as follows:
Wall Mirrors Special Windows
Units produced 25 25
Materials moves per product line 5 15
Direct labor hours per unit 200 200
Budgeted materials handling, P50,000

Required:
a. Compute the materials handling costs allocated to each product under a costing system that assigns overhead on the
basis of direct labor hours.

b. Compute the materials handling costs assigned to one unit of each product under activity-based costing.

Solution:
Wall Mirrors Special Windows
a. (P50,000x200/400) P25,000 (P50,000x200/400) P25,000

For each Product P25,000/25 =P1,000 P25,000/25 =P1,000

b. (P50,000 x 5/20 ) P12,500 (P50,000 x 15/20 ) P37,500

For each Product P12,500/25 = P500 P37,500/25 P1,500