1. The following information has been extracted from the financial reports of ABC Ltd.

  $
Sales 25,000 units @ £20 per unit 500,000
Rent per annum 30,000
Rates per annum 10,000
Insurance per annum 15,000
Overhead costs 10,000
Other variable costs 245,000

 

Additional information:

  1. The annual rent, rates and insurance costs are fixed.
  2. It has been estimated that 50% of the overhead costs are variable and 50% are fixed.

Required:

  1. Show how many units must be sold to break-even using CVP Analysis.
  2. How many units must be sold to obtain a profit of $30,000 (Target profit)?
  3. Calculate the break-even point (units) if fixed costs (including the fixed cost portion of overhead cost) increased to $70,000.
  4. Explain the effects of relatively high fixed costs & low variable costs, and relatively low fixed costs & high variable costs.

 

2. Excellent Ltd.’s sales budget in units for 6 months ending December 2020 is as follows:

July 1,000

August 1,200

September 1,300

October 1,500

November 1,700

December 1,800

The price per unit will be $20 for the three months to 30 September 2020 but will be increased to $22 from 1 October.

This company manufactures its goods one month before the goods are sold. Monthly production is 110% of the following month’s sales. Budgeted sales for January 2020 are 2,000 units.

 

  1. Prepare the company’s sales budget for the six months ending December 2020.
  2. Prepare the company’s production budget.
  3. Explain the reason(s) of a company in conducting budgeting.

 

3. The HKSCE company produces and sells a product, named Success, at $30 per unit. Each year 6,000 of this product are sold. The marketing director suggests that, if the price is reduced to $28, sales will increase to 8,000 units. The sales manager thinks that sales will increase to 11,000 units if the price is further reduced to $25.

 

The following information is available for 6,000 units.

Direct materials $48,000

Direct labour $66,000

Variable selling expenses (commission) $12,000

Fixed expenses $48,000

 

  1. Calculate the profit or loss from the sale of (i) 6,000 (ii) 8,000 and (iii) 11,000 Recommend which option should be adopted.
  2. Evaluate the usefulness of marginal costing.

 

4. ABC Company started their business on January 1, the following were the transactions in January:

Jan 1 – Issued capital stock in exchange for $500,000 cash

Jan 1 – Purchased an equipment with original value $100,000, paid $50,000 in cash and $50,000 will be paid in February. The estimated residual value and useful life are $10,000 and 5 years respectively.

Jan 5 – Paid January office rent expense $8,000 in cash.

Jan 8 – Client A made $8,000 cash payment in advance for some services.

Jan 10 – Provided services to client B and billed him $10,000.

Jan 15 – Paid January utilities of $2,000 in cash

Jan 18 – Received $7,000 cash from client B.

Jan 19 – Services valued $8,000 were rendered to client C but not yet billed.

Jan 23 – Consulting services valued $3,000 were rendered to client A.

Jan 31 – Recorded salary expense of $9,000 which to be paid on February 1.

 

a) Prepare journal entries for the above transactions (excluding those on Jan 19 , 23 and 31)

Possible accounts involved are: Capital Stock, Cash, Equipment, A/C Payable, A/C Receivable, Rent Expense, Unearned Fee Income, Fee Income, Utilities Expense, etc. Use the following format of the General Journal in your answer book:

 

General Journal
Date Account Title & Description Dr. Amt. Cr. Amt.
       

 

b) For activities on Jan 1 , 19 , 23 , 31 , state the adjusting journal entries on 31st. (copy the following table and complete it in your answer book)

 

ABC Company General Journal December 31, 20XX.
Item   Debit Credit
1 Depreciation Expense

Accumulated Depreciation: Equipment

** January depreciation adjustment

    
2 A/C Receivable

Fee Income

** January accrued fee income adjustment

    
3 Unearned Fee Income

Fee Income

** January unearned fee income adjustment

    
4 Salary Expense

Salary Payable

** January accrued salary expense adjustment

    

 

 

c) Post the above entries to the appropriate ledger accounts.

Use T-account format and possible ledger accounts involved are:

Capital Stock, Cash, Equipment, A/C Payable, A/C Receivable, Rent Expense, Unearned Fee Income, Fee Income, Utilities Expense, Retained Earning, and the accounts included in all the adjusting entries, etc.

 

Example (use this T-account format in your answer book):

Cash
Dr. Cr.
Opening Balance———> $1,000
$500
Closing—————> $500

 

d) Base on the answers in part b) and c), prepare the adjusted Trial Balance on January 31. Listing sequence: Asset items, Liabilities items, Equity items, Revenue items, Expense items.

e) Prepare the closing entries for Revenue account, Expense accounts and Retained Earnings account.

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