MIM 2022

INTRODUCTION TO MANAGEMENT ACCOUNTING

Group Assignment

STUDY GROUP: 35

Due date: 22 January 2022 by 11.59pm GMT

Points Available Points Earned

Problem 1: 25
Problem 2: 25
Problem 3: 25
Problem 4: 25

Total: 100

* Please paste your solutions to the problems on this document and return it in either Word or pdf (not Excel).

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 Problem 1: PX Company – Breakeven Analysis (25 points)

“PX” Company produces and sells one product. The Company manufactures its production in two
plants. Last year’s sales were 95,980 units, 50,520 produced in Plant 1 and 45,460 produced in Plant 2.
Operating profits were £ 84,560 for Plant 1 and - £ 23,500 (i.e., a loss) for Plant 2. Variable and fixed
manufacturing costs for Plant 1 were £ 55/unit and £ 1,330,000, respectively. Fixed manufacturing costs
for Plant 2 depended on production levels as shown below. Variable costs per unit at Plant 2 were 15
percent higher in level 2 than in level 1.

Plant 2: Production Levels & Fixed Costs Annual Annual

Production Levels Fixed Costs

Production Level 1 0-55,000 £ 1,160,000

Production Level 2 55,001-100,000 2,100,000

Last year’s cost structure is expected to be the same this year. The Company expects to sell everything it
produces at the same unit price as last year, i.e., £ 83/unit.

Required:

1. (10 points) Compute the per-unit contribution margin and the break-even volume for Plant 1.

The selling price is £ 83/unit and the variable cost is £ 55/unit.

So the per-unit contribution margin = price - variable cost = 83 – 55 = £ 28/unit.

The fixed manufacturing cost is £ 1,330,000.

¿ manufacturing cost 1,330,000
So the break-even volume= = =47,500 units
per −unit contribution margin 28

2. (15 points) Compute the per-unit contribution margin and the break-even volumes for each of
the two production levels for Plant 2 (for Production Level 2, please incorporate the change in
per-unit contribution margin around the 55,000 discontinuity production level in your solution).

For Production Level 1:

The selling price is £ 83/unit and the sales volume is 45,460.
The profit is - £ 23,500 and the fixed cost is £ 1,160,000.
So the variable cost = sales volume*price – fixed cost – profit = 45,460*83 - - 1,160,000 +
£23,500 = 2,636,680
Variable cost per unit = 2,636,680/45,460 = £58
Per-unit contribution margin = price - variable cost = 83-58 = £25
¿ manufacturing cost 1,160,000
Break-even volume= = =46,400 units
per −unit contribution margin 25

For Production Level 2:

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Variable costs per unit at Plant 2 were 15 percent higher in level 2 than in level 1.
So variable cost per unit = 58*1.15 = £66.7
Per-unit contribution margin = 83-66.7= £16.3
¿ manufacturing cost 2,100,000
Break-even volume = = =128,834 units
per −unit contribution margin 16.3

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 Problem 2: First International Bank – Activity-based Costing (25 points)

First International Bank (FIB) is examining the profitability of its Premier Account, a combined savings
and checking account. Depositors receive a 7% annual interest rate on their average deposit. FIB earns
an interest rate spread of 3% by lending money for residential home loan purposes at 10 percent. Thus,
FIB would gain £ 60 on the interest spread if a depositor has an average Premier Account Balance of £
2,000.

The Premier Account allows depositors unlimited use of services such as deposits, withdrawals,
checking account, and foreign currency drafts. Depositors with Premier Account balances of £ 1,000 or
more receive unlimited free use of services. Depositors with minimum balances of less than £ 1,000 pay
£20 a month service fee for their Premier Account.

FIB recently conducted an activity-based costing study of its services. It assessed the following costs for
six individual services. The use of these services in 2007 by three customers (i.e., “XXY1”, “XXY2”,
“XXY3”) is as follows:

ABC-based Account Usage

Cost per XXY1 XXY2 XXY3
“Transaction”
Deposit/withdrawal with teller £ 2.50 40 50 5
Deposit/withdrawal with ATM 0.80 10 20 16
Deposit/withdrawal on pre-arranged 0.50 0 12 60
monthly basis
Bank checks written 8.00 9 3 2
Foreign currency drafts 12.00 4 1 6
Inquiries about account balance 1.50 10 18 9
Average Premium Account Balance £ 1,100 £ 800 £ 25,000

Assume that “XXY1” and “XXY3” always maintain a balance above £ 1,000 while “XXY2” always has
a balance below £ 1,000 in 2007.

Required:

1. (15 points) Compute the 2007 profitability of the “XXY1”, “XXY2”, and “XXY3” Premier
Accounts at FIB.

For XXY1:
Annual revenue = 1,100*3% = £ 33
Annual cost = 2.5*40 + 0.8*10 + 8*9 + 12*4 + 1.5*10 = £ 243
Annual profit = 33 – 243 = - £ 210
For XXY2:
Annual revenue = 800*3% + 12*20 = £ 264
Annual cost = 2.5*50 + 0.8*20 + 0.5*12 + 8*3 + 12*1 + 1.5*18 = £ 210
Annual profit = 264 – 210 = £ 54
For XXY3:
Annual revenue = 25,000*3% = £ 750
Annual cost = 2.5*5 + 0.8*16 + 0.5*60 + 8*2 + 12*6 + 1.5*9 = £ 156.8
Annual profit = 750 – 156.8 = £ 593.2

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2. (10 points) Is there any evidence of “cross-subsidization” among the three Accounts? Why
might FIB worry about this cross-subsidization if the Premier Account product offering is
profitable as a whole?
There appears to be a cross-subsidization among the three Accounts because the profitability
heavily rely on Customer XXY3 while Customer XXY2 does not yield a high profit and
Customer XXY1 is a loss. FIB should worry about this cross-subsidization. Because if the bank
cannot attract enough customers like XXY3 who have large amount of deposits (much more
than £ 1,000) and low using frequency of the services and more XXY1 customers come, they
cannot remain profitable.

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 Problem 3: Friendly Grocer – SG&A Overhead Allocations (25 points)

Friendly Grocer has three departments in its store: beverages, dairy and meats, and canned and
packaged foods. Operating results for the last month are as follows (in $):

Beverages Dairy & Meats Canned & Packaged

Revenue 250,000 470,000 620,000
Cost of Goods Sold (CGS) (200,000) (329,000) (527,000)
Overhead (20% of CGS) (40,000) (65,800) (105,400)
Profit 10,000 75,200 (12,400)

Uncertain about the impact of the overhead allocation, further analysis indicated that overhead consisted
of the following items (in $):

Shelf Space 90,000

Handling Costs 20,000
Coupon Costs 15,000
Shrinkage 28,000
Other 58,200

Shelf space costs consist of store occupancy costs such as depreciation on the building and fixtures,
utilities, store maintenance, property taxes, and insurance. Beverages comprise 25 per cent of the shelf
space, dairy and meats comprise 35 per cent of the space, and canned and packaged goods comprise 40
per cent of the shelf space. Handling costs consist of the labor required to stock the shelves and remove
outdated products. The beverage suppliers (Coca Cola, Pepsi, etc.) provide the labor to shelf their
products (i.e., the beverage delivery people stock their products on the shelf). Dairy and meats labor
costs for stocking are 3/4 of the handling costs and canned and package foods’ labor and handling costs
are 1/4 of the total. Coupon costs consist of the labor costs to process the redeemed coupons. Dairy and
meats do not have any coupons. Twenty per cent of the coupons redeemed are for beverages and 80
percent are for packaged and canned goods. Shrinkage consists of the cost of products spoiled, broken,
and stolen. Of the total $28,000, $1,000 related to beverages, $22,000 to dairy and meats, and the
remaining $5,000 to canned and packaged goods.

Required:

1. (15 points) Using the new information about SG&A, re-calculate the profit of each department
(hint: please allocate the “Other” category of SG&A as a % of the departments’ CGS).

2. (10 points) How does this new profit information help the seniors of Friendly Grocer vis-à-vis
the original profit calculation?

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 Problem 4: Paramount Company – Variance Analysis (25 points)

The following information is provided to assist you in evaluating the performance of the production
operations of Paramount Company:

Units Produced (actual) 21,000

Master Budget:
Direct Materials £ 165,000
Direct Labor 140,000
Manufacturing Overhead 199,000

Standard Costs per Unit:

Direct Materials 5 pounds/unit @£ 1.65/pound
Direct Labor ½ hour/unit @ £ 14/DL hour
Variable Overhead £ 11.90 * DL hour

Actual Costs (Totals):

Direct Materials £ 188,700 (for 102,000 pounds)
Direct Labor £ 140,000 (for 10,700 hours)
Tot Manufacturing Overhead £ 204,000 (61% of which is VOH)

Required:

1. (15 points) Prepare a variance analysis for each variable cost (hints: 1) actual quantities of direct
materials purchased equal actual quantities used into production; 2) variable overhead is applied
based on DL hours). Interpret the variances.

2. (10 points) Prepare a fixed overhead variance analysis (hint: fixed overhead are applied based on
units produced). Interpret the variances.

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Useful Templates to solve Problem 4:

DM Price Variance Efficiency Variance

AQ *(AP – SP) SP * (AQ – SQ)

DL Price Variance Efficiency Variance

AQ *(AP – SP) SP * (AQ – SQ)

VOH Price Variance Efficiency Variance

AQ *(AP – SP) SP * (AQ – SQ)

FOH Spending Variance Volume Variance

Actual FOH – Budgeted FOH Budgeted FOH – Applied FOH