QUESTION 1 (14 MARKS)

Sunny Company manufactures umbrellas and sells them at $30 each. At present, the umbrella is manufactured in a small factory that relies heavily on direct labour workers.

Product costs include:

Variable selling costs is 10% of selling price and fixed selling and administrative expenses amounted to $54,000.

Required:

(a)  Calculate the break-even point in units and sales dollar.                                     (3 marks)

(b)  If 45,000 umbrellas are sold last year, what is the company’s net operating income?

What is the margin of safety in units?                                                                   (2 marks)

(c)  The company is discussing the construction of a new, automated factory to manufacture   the umbrellas. The new factory would reduce variable cost per unit to $14, but it would cause fixed costs to double in amount per year. If the new factory is built, what would be the company’s new break-even point in units?                                                     (2 marks)

(d)  If the new factory is built, how many units must be sold to earn the same profit as last year?      (1  mark)

(e)  Based on your calculations from parts (a) to (d), discuss two (2) reasons why  Sunny Company should or should not construct the new, automated factory.                  (3 marks)

(f)   If the new factory is built, the company will have excess capacity to manufacture raincoats too. The marketing director predicted that the yearly sales will be 45,000 umbrellas and 15,000 raincoats. The raincoats will be sold at $25 each with a variable cost of $12. Total fixed costs will now be $549,000. What is the break-even point for the umbrellas and raincoats in units?        (3 marks)

QUESTION 2 (10 MARKS)

The following income statement was prepared by an inexperienced contract staff.

Income Statement for the month ended 30 November 2023

The following additional information is available:

(i)   60% of the utilities and 75% of the rent apply to factory operations. The remaining amounts apply to selling and administrative activities.

(ii)  Inventory balances at the beginning and end of November were:

Required:

As  the  newly  appointed  management  accountant,  you  are  asked  to  prepare  the  correct Statement of Cost of Goods Manufactured and Income Statement showing clearly the details of the costs.

QUESTION 3 (16 MARKS)

Jay Ltd is the sole distributor of a product that is increasing in popularity among the consumers. The company’s income statements for the three mostrecent months are as follow:

From the company’s expenses (including cost of goods sold),

(a)     Identify which of the items is/are fixed. Explain how you were able to identify the cost. (2 marks)

(b)    Identify which of the items is/are variable. Explain how you were able to identify the cost. (2 marks)

(c)     Identify which of the items is/are mixed. Explain how you were able to identify the cost. Using the high-low method, write out the cost formula for the mixed cost/(s). (5 marks)

(d)     Calculate the net operating income for a targeted sales of 11,000 units.         (5 marks)

(e)     Briefly explain why it is important for a manager to know the cost behaviour of the company’s expenses. (2 marks)

QUESTION 4 (10 MARKS)

Unique Company manufactures specialty stationery to customer order. There are two production departments. The following budgeted information for the coming year is available:

Currently, overhead is applied on the basis of machine hours using a plantwide rate. However, the accountant has been wondering whether it might be better to use departmental overhead rates. After analysing the overhead costs and the drivers for the two departments, she decided that Assembly should base its overhead rate on direct labour hours and Finishing should base its overhead rate on machine hours.

The accountant has been asked to calculate the total manufacturing cost for Job 54 with the following information: