Cost and Management Accounting II additional exercise on Chapter 1

Exercise 1. Zena Concepts, Inc., was founded by Zemenu Adugna, a graduate student in
engineering, to market a radical new speaker he had designed for automobiles sound
system. The company’s income statement for the most recent month is given below:

Sample Projected Income Statement

Total Per Unit
Sales (400 speakers) Br. 100, 000 Br.250.00
Variable Expenses 60, 000 150.00
Contribution Margin Br. 40, 000 Br.100
Fixed Expenses 35, 000
Net Income Br. 5,000

 Yohannes Tilahun, the senior accountant at Zena Concepts, wants to demonstrate

the company’s president how the concepts developed on the preceding pages can
be used in planning and decision-making. To this end, Yohannes will use the
above data to show the effects of changes in variable costs, fixed costs, sales, and
sales volume on the company’s profitability.
(i) Changes in Fixed Costs and Sales Volume:
 Zena Concepts is currently selling 400 speakers per month (monthly sales of
Br.100, 000). The sales manager feels that a Br.10, 000 increase in the monthly
advertising budget would increase monthly sales by Br.30, 000.
 Should the advertising budget be increased? Yes bc Ol increase to 25,000
 Solution
Fc= 35000+10,000=45,000
Sale=100,000+30,000=130,000

REVENUE 130000
Tvc 60000
TCM 70,000
Fc 45000
OI 25,000
(ii) Changes in Variable Costs and Sales Volume
 Refer to the original data. Management is contemplating the use of high- quality
components, which would increase variable costs by Br.10 per speaker.
However, the sales manager predicts that the higher overall quality would
increase sales to 480 speakers per month.

 Should the higher quality component be used? YES BC OI Increase to 8,200

 SOLUTION
 VCU=150+10=160 *480=76,800
 Sale =400+80=480*250=120,000
Sale 120,000
Tvc 76,800
TCM 43,200
 FC 35,00
OI 8,200

(iii) Change in Fixed Cost, Sales Price, and Sales Volume:

 Refer to the original data and recall that the company is currently selling 400
speakers per month. To increase sales, the sales manager would like to cut
selling price by Br 20 per speaker and increase the advertising budget by Br 15,
000 per month. The sales manager argues that if these two steps are taken, unit
sales will increase by 50%.
 Should the change be made? Yes blc OI Increase to28,000
 price=250-20= 230
Fc 35,00+15000=50000
Q=600 *230=138,00

Sale 138,000

Tvc 60,000

TCM 78,00

FC 50,000

OI 28,000

(iv) Changes in Variable Cost, Fixed Cost, and Sales Volume:

 Refer to the original data. The sales manager would like to replace the sales
staff on a commission basis of Br 15 per speaker sold, rather than on flat/fixed
salaries that now total Br 6, 000 per month. The sales manager is confident that
the change will increase monthly sales by 15%.
 Should the change be made? Yes blc OI increase to 19,500birr

Sale 0.15*100000= +100+15,000=115,000

Tvc 15+150=165*100= 66,500
Fc 35000-6000= 29,000

Sale 115,000

Tvc 66,500
 TCM 48,500

FC 29,000

OI 19,500

(v) Changes in Regular Sales Price:

 Refer the original data. The company has an opportunity to make a bulk sales of
150 speakers to wholesalers if an acceptable price can be worked out. This sale
would not disturb the company’s regular sales.
 What price per speaker should be quoted to the wholesaler if Zena Concepts
wants to increase its monthly profits by Br 3, 000? P=150+20=3000/150+150

Sale

Tvc

TCM

FC

OI

Exercise 2. Tantu Company manufactures and sales a single product. During the year
just ended the company produced and sold 60,000 units at an average price of Br.20 per
unit. Variable manufacturing costs were Br 8 per unit, and variable marketing costs
were Br 4 per unit sold. Fixed costs amounted to Br. 180,000 for manufacturing and
Br.72, 000 for marketing. There was no year-end work-in-progress inventory. Ignore
income taxes.
Given

Q=60,000

Sp=20

VCU=12=8+4

Fc=252,000=180,000+72,000

Cm=20-12 =8

Cm=8/20=0.4

TNI =180,000

Sale
 Tvc

TCM

FC

OI

Instructions:

a. Compute Tantu’s breakeven point (BEP) in sales birrs for the year.

BEQ=Fc/Cm =252,000/8==31,500✔
BEB=252,000/0.4 =630,000birr
b. Compute the number of sales units required to earn a net income of Br 180,000
during the year
Q= Fc+TNI/(1-T)/Cm =252,000+180,000/(1-0)/8=432,000/8=54,000✔
c. Tantu’s variable manufacturing costs are expected to increase 10 % in the coming
year. Compute the firm’s breakeven point in sales birrs for the coming year.
BEB=Fc/cm%=252,000/0.36=700,000birr✔
d. If Tantu’s variable manufacturing costs do increase 10 %, compute the selling price
that would yield the same CM-ratio in the coming year.

Exercise 3. Consider the cost structure for ABC Company and XYZ

ABC Co. and XYZ Co.

Comparative Cost Structures
ABC Co. XYZ Co.

Amount Percent Amount Percent

Sales Br. 500,000 100 Br. 500,000 100

Variable costs 100,000 20 300,000 60
Contribution Margin 400,000 80 200,000 40
Fixed costs 300,000 100,000
Net income Br. 100,000 Br. 100,000

a. The break even sales for each company ?

X=%=0.8 =fc /cm%=300,000/0.8=375,000birr
Y=%=0.4 =100,000/0.4=250,000birr
b. The margin of safety for each company?

X=500,000-375,000=125,000birr ,

MS%=125000/500000=25%

Y=500,000-250,000=25000birr
MS%=250,000/500000=50%