Part A: Cost-Volume-Profit Analysis [10 Marks]
Hillar Ltd produces a variety of chemicals. One division makes reagents for laboratories. The division’s projected income statement for the coming year is:
| Sales (203 000 Units @ $70) | $ 14 210 000 |
| Total variable cost | 8 120 000 |
| Contribution margin | $ 6 090 000 |
| Total fixed cost | 4 945 500 |
| Operating income | $ 1 144 500 |
Required:
- Compute the contribution margin per unit and calculate the break-even point in units. Calculate the contribution margin ratio and the break-even sales revenue. [2 Marks]
- The divisional manager has decided to increase the advertising budget by $250 000. This will increase sales revenues by $1 million. By how much will operating income increase or decrease as a result of this action? [2 Marks]
- Suppose sales revenues exceed the estimated amount on the income statement by $1 500 000. Without preparing a new income statement, by how much are profits underestimated? [2 Marks]
- Compute the margin of safety based on the original income statement. [2 Marks]
- Compute the degree of operating leverage based on the original income statement. If sales revenues are 8% greater than expected, what is the percentage increase in operating income? [2 Marks]
Part B: Absorption and Variable Costing Income Statement [10 Marks]
Billy Ltd produces and sells wooden pallets that are used for moving and stacking materials. The operating costs for the past year were as follows: During the year, Billy produced 200 000 wooden pallets and sold 204 300 at $9 each. Billy had 8200 pallets in beginning finished goods inventory; costs have not changed from last year to this year. An actual costing system is used for product costing.
| Variable costs per unit:
Direct materials |
$2.85 |
| Direct labour | $1.92 |
| Variable overhead | $1.60 |
| Variable selling | $0.90 |
| Fixed costs per year:
Fixed Overhead |
$180 000 |
| Selling and administrative | $ 96000 |
Required:
- What is the per-unit inventory cost that is acceptable for reporting on Billy balance sheet at the end of the year? How many units are in ending inventory? What is the total cost of ending inventory? [2 Marks]
- Prepare absorption-costing income statement. [2 Marks]
- What would the per-unit inventory cost be under variable costing? Does this differ from the unit cost computed in requirement 1? Why? [2 Marks]
- Prepare variable-costing income statement. [2 Marks]
- Suppose that Billy Ltd had sold 196 700 pallets during the year. What would absorption-costing operating income have been? Variable-costing operating income? [2 Marks]
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