UNITY UNIVERSITY

DEPARTMENT OF ACCOUNTING & FINANCE

INDIVIDUAL ASSIGNMENT-COST & MANAGEMENT ACCOUNTING II
Max. marks= 10%
1. Ethio Food Services Company operates and services snack vending machines

located in restaurants, gas stations factories etc. the machines are rented from the

manufacturer. In addition, Ethio must rent the space occupied by its machines. The

following expenses and revenue relationships pertain to a contemplated expansion

program of 20machines

Fixed monthly expenses follow; -

Machine rental; 20machine @Br26.75 Br. 535

Space rental: 20 locations @Br 14.40 288
Part time wages to service he additional 20 machines 727
Other fixed costs 50
Total monthly fixed costs Br. 1600

Other data follows

Per unit Percent

Selling price Br. 0.50 100%
Cost of snack 0.40 80%
Contribution margin Br. 0.10 20%

Instructions: - these questions relate to the above data unless other wise noted.

Consider each question independently

a. What is the monthly BEP (in units and in Birrs)?

b. If 20,000 units were sold, what would be the company’s net income?
c. If the space rental cost were doubled, what would be the monthly BEP (in
units and in birrs)?
d. If, in addition to the fixed rent, Ethio food services Company paid the
vending machine manufactures 1 cent per units sold, what would be the
monthly BEP (in units and in Birrs)?

PREPARED BY: ZEWDIE B. 1

 e. If in addition to the fixed rent, Ethio paid the machine manufacturer 2 cents
for each unit sold in excess of the BEP, what would the new net income be
if 20,000 units were sold? Prefer the original data
2. Luxury products inc. manufactures recreational equipment one of the company’s
products, a skateboard, sells for Br. 37.50 the skateboards are manufactured in an
antiquated plant that relies heavily on direct labor workers. Thus, variable costs
are high, totaling Br.22.50 per skateboard.
Over the past year the company sold 40,000 skateboards, with the following
operating results: -
Sales (40, skateboards) Br.1, 500,000
Variable expenses 900,000
Contribution margin 600,000
Fixed expenses 480,000
Net income Br.120, 000

Management is anxious to maintain and perhaps even improve its present level of
income from the skateboards.

Instruction; -

a. Compute the CM ratio and the BEP (in skateboards and in birrs). What is the
degree of operating leverage at last year’s level of sales?
b. Due to increase in labor rates, the company estimates that variable costs will
increase by Br. 3 per skateboard next year. If the change takes place and the
selling price per skateboard remains constant at Br.37.50. What will be the new
CM ratio and the new BEP (in skate boards and in birrs)
c. Refer to the data in (b) above. If the expected change in variable costs takes
place, how many skateboards will have to be sold next year to earn the same
net income as last years?
d. Refer to the data in (b) above. The president has decided that the company
may have to raise the selling price on the skateboards. If luxury products want
to maintain the same CM ratio last year, what selling price. Per skateboard
must it charge in the next year to cover the increased labor costs?
e. Refer to the original data. The company is considering the consideration of a
new automated plant to manufacture the skateboards. The new plant would
slash variable costs by 40% but it should cause fixed costs to increase by 90%.

PREPARED BY: ZEWDIE B. 2

 If the new plant were built, what would be the company’s new CM ratio and the
new BEP (in skateboards and in birrs)?

3. Tafach Candy company is a wholesale distributor of candy. The company service

grocery, convenience, and drugstores in a large metropolitan area. The company

has achieved small but steady growth in the sales over the past few years while

candy prices have been increasing. Tafach candy is formulating its plans for the

coming fiscal year. Presented below are the data used to project the current year

after tax income of Br.110, 400.

Average selling price per box Br, 4

Average variable costs per box
Cost of candy Br, 2
Selling expense 0.4
Total Br. 2.4
Annual fixed costs
Selling Br.160, 000
Administrative 280,000
Total F. Expenses 440,000
Annual sales volume (390,000 boxes) Br. 1,560,000
Tax rate 40%
Manufacturers of candy have announced that they will increase price of their products on

average of 15% in the coming year, owning to increase in raw material (Sugar, Cocoa,

Peanuts, etc.) and labor costs. Tafach Candy Company expects that all other costs will

remain at the same rates or level as in the current year.

Instructions: -

a) What is Tafach Company’s BEP in boxes of candy for the current year?
b) What selling price per box must Tafach Candy Company charge to cover the 15%.
Increase in the cost candy and still maintains the current contribution. Margin
ration?
c) What volume of sales in birr must the Tafach candy company achieves in the
coming year to maintain the same net income after taxes as projected for the
current year if the selling price of candy remains at Br 4 per box and the cost of
candy increases by 15%?
d) What strategies might Tafach Candy Company use to maintain the same net
income after taxes as projected for the current year?

PREPARED BY: ZEWDIE B. 3

 4. Use the following data to answer the questions below:

Mega Muscle Power Gym Pro force

Selling Price p/u 280 400 580
Contribution margin 84 154 116
p/u
Monthly sales volume- 6000 4000 2000
units
Fixed Expense per Total of 1,280,000
month

REQUIRED:
a) Calculate the contribution margin ratio of each product.
b) Calculate the firm’s overall contribution margin ratio.
c) Calculate the firm’s monthly break-even point in sales dollars.
d) Calculate the firm’s monthly operating income.
e) Management is considering the elimination of the ProForce model due to its low sales
volume and low contribution margin ratio. As a result, total fixed expenses can be reduced
to $1,080,000 per month. Assuming that this change would not affect the other models,
would you recommend the elimination of the ProForce model? Explain your answer.
f) Assume the same facts as in part e. Assume also that the sales volume for the Power
Gym model will increase by 1,000 units per month if the ProForce model is eliminated.
Would you recommend eliminating the ProForce model?

5. Maple Enterprises sells a single product with a selling price of $75 and variable
costs per unit of $30. The company’s monthly fixed expenses are $22,500.
a. What is the company’s break-even point in units?
b. What is the company’s break-even point in dollars?
c. Construct a contribution margin income statement for the month of
September when they will sell 900units.
d. How many units will Maple need to sell in order to reach a target profit
of $45,000?
e. What dollar sales will Maple need in order to reach a target profit
of $45,000?
f. Construct a contribution margin income statement for Maple that
reflects $150,000in sales volume.
6. Marlin Motors sells a single product with a selling price of $400 with variable costs per unit
of $160. The company’s monthly fixed expenses are $36,000 and it is operating at a tax
rate structure of 40%

a) What is the company’s break-even point in units?

b) What is the company’s break-even point in dollars?

PREPARED BY: ZEWDIE B. 4

 c) Prepare a contribution margin income statement for the month of
November when they will sell 130 units.
d) How many units will Marlin need to sell in order to realize a target net
profit after tax of $96,000?
e) What dollar sales will Marlin need to generate in order to realize a target
net profit after tax of $96,000?
7. Salvador Manufacturing builds and sells snowboards, skis and poles. The sales
price and variable cost for each follow:

Their sales mix is reflected in the ratio 7:3:2. If annual fixed costs shared by the
three products are $196,200, how many units of each product will need to be sold
in order for Salvador to break even?

8. Company A has current sales of $10,000,000 and a 45% contribution margin. Its
fixed costs are $3,000,000. Company B is a service firm with current service
revenue of $5,000,000 and a 20% contribution margin. Company B’s fixed costs
are $500,000. Compute the degree of operating leverage for both companies.
Which company will benefit most from a 25% increase in sales? Explain why.
9. Delta Co. sells a product for $150 per unit. The variable cost per unit is $90 and
fixed costs are $15,250. Delta Co.’s tax rate is 36% and the company wants to
earn $44,000 after taxes.
a) What would be Delta’s desired pre-tax income?
b) What would be break-even point in units and dollar to reach the income goal
of $44,000 after taxes?
c) What would be the desired sales in units and dollar to reach the income goal
of $44,000 after taxes?

10. Fill in the missing amounts for the four companies. Each case is independent of
the others. Assume that only one product is being sold by each company.

PREPARED BY: ZEWDIE B. 5

11. ZiZu Woolen Products Company makes outdoor shirts. A chain store manager has
approached the sales manager of ZiZu offering to buy 40, 000 shirts at Br.16.50
per shirt. The offer is to be filled any time during the coming year. Data pertaining
to the coming year’s planned operations without this order is as follows:

Sales (250,000 shirts) Br.5, 000, 000

Cost of Sales 4, 150, 000

Gross profit 850, 000

Selling & Administrative 600,000

Exp.

Income Br.200, 000

ZiZu Company has a capacity to make 300, 000 shirts per year. Fixed costs
included in cost of sales are Br.400, 000. The only variable selling and
administrative expenses are a 1% sales commission and a Br.1.25 per shirt fee
paid to the designer. The sales manager believes that accepting the offer would
result in a loss because the average total cost of a shirt is Br.19.00. He feels
that even though sales commission would not be paid on the order, a loss would
result.

Instruction:

a. Determine whether the company should accept the offer. Assume

that the special order would not affect existing sales and would
not require the sales commission.

b. Suppose the special order was for 60, 000 shirts instead of 40,
000 shirts and sales at regular prices would fall to meet the special
order. What would the firm’s income be if it accepted the order?
Would you recommend the company to accept this special order?
Why or why not.

PREPARED BY: ZEWDIE B. 6

12. Boston Executive, Inc., produces executive limousines and currently manufactures
the mini bar inset at these costs: Cost per units: Variable costs: Direct material
$950, Direct Labor $650, Variable Overhead $300, equals total variable cost of
$1900 per unit.
Fixed costs per unit: Depreciation of equipment $500, Depreciation of building
$200, Supervisor salaries $300, total fixed costs per unit $1000. Total cost $2,900.
The company received an offer from Elite Mini-Bars to produce the insets
for $2,100 per unit and supply 1,000 mini-bars for the coming year’s estimated
production. If the company accepts this offer and shuts down production of this
part of the business, production workers and supervisors will be reassigned to
other areas. Assume that for the short-term decision-making process
demonstrated in this problem, the company’s total labor costs (direct labor and
supervisor salaries) will remain the same if the bar insets are purchased.
The specialized equipment cannot be used and has no market value. However,
the space occupied by the mini-bar production can be used by a different
production group that will lease it for $55,000 per year. Should the company
make or buy the mini-bar insert?
13. Trifecta Distributors has decided to discontinue manufacturing its X Plus model.
Currently, the company has 4,600 partially completed X Plus models on hand. The
government has put a recall on a particular part in the X Plus model, so each base
model must now be reworked to accommodate the style of the new part. The
company has spent $110 per unit to manufacture these X Plus models to their
current state. Reworking each X Plus model will cost $20 for materials and $20 for
direct labor. In addition, $7 of variable overhead and $32 of allocated fixed
overhead (relating primarily to depreciation of plant and equipment) will be
allocated per unit. If Trifecta completes the X Plus models, it can sell them for $160
per unit. On the other hand, another manufacturer is interested in purchasing the
partially completed units for $104 each and converting them into Z Plus models.
Prepare a differential analysis per unit to determine if Trifecta should complete the
X Plus models or sell them in their current state.

14. Strawberry Sweet Company makes a variety of jams and jellies. During June,
55,00055,000 gallons of strawberry mash was processed at a joint cost of
$40,000$40,000. This produced 42,00042,000 gallons of preserve-grade mix and
4,0004,000 gallons of strawberry juice for jelly. The juice could be processed
further into energy drinks, and the preserve mix could be processed further into ice
cream flavoring. Information on these items is shown:
Product, Sales Value at Split-off, Estimated Further Processing Costs, and Sales
Values after Processing, respectively are: Preserve mix: $104,000, $8,000,
$125,000. Juice for jelly: $50,500, $40,000, and $70,000.

PREPARED BY: ZEWDIE B. 7

 a. Assume that the joint cost is allocated to the products based on the
physical quantity of output of each product. How much joint cost should be
assigned to each product?
b. How much joint cost should be assigned to each product if the relative
sales value allocation method is used?
c. Which products should be processed further?
15. Top Company expects the following results for the coming year.
X Y Z Total
Sales Br.100, 000 Br.150, 000 Br.470, 000 Br.720, 000
Variable costs Br.52, 000 Br.50, 000 Br.190, 000 Br.292, 000
Fixed costs 80, 000 50, 000 240, 000 370, 000
Total costs 132, 000 100, 000 430, 000 662, 000
Profit (Loss) (Br.32, 000) Br.50, 000 Br.40, 000 Br.58, 000

Instruction. Answer each of the following questions independently.

a. Suppose that all fixed costs are allocated based on the floor space each

segment occupies and all are unavoidable. What will total profit be if Top drops

the X segment?

b. Suppose that Top could avoid Br.55, 000 in fixed costs by dropping the X

segment. However, the managers believe that if they do drop X, sales of each

of the other lines will fall by 5%. What will profit be if Top drops X and losses

5% of the sales of each of the other segments?

PREPARED BY: ZEWDIE B. 8