Analysis of Revenues and Costs

05 Jun Analysis of Revenues and Costs

Question

ASSIGNMENT – BMAC5203

SECOND SEMESTER (INTAKE MARCH 2014)

BMAC5203 – ACCOUNTING FOR BUSINESS DECISION MAKING

ASSIGNMENT (60%)

OBJECTIVE:

To assess students’ ability to ethically use accounting information for costing, decision making, planning and control.

INSTRUCTIONS:

1. Assignment Format:

a. Use 12-point of Arial font. The line spacing should be 1.5 for the main text and tables.

b. Provide references.

c. References should use the American Psychological Association (APA) format. References should be up-to-date (year 2005 and onwards).

2. Notes:

a. Assignments should be submitted according to the fixed date.

b. Plagiarism is not acceptable. If you are not sure what is meant by plagiarism, refer to the various websites which discuss this matter, e.g. owl.english.purdue.edu/handouts.

3. The assignment consists of FIVE (5) unrelated tasks. Answer all. The details of the tasks are explained in pages 2 – 6.

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ASSIGNMENT – BMAC5203

TASK 1: CVP Analysis

Success Company’s contribution format income statement for the most recent month is given below:

Sales (40,000 units) . . . . . . . . . . . . . . . . . . $800,000 Variable expenses . . . . . . . . . . . . . . . . . . . 560,000 Contribution margin . . . . . . . . . . . . . . . . . . 240,000 Fixed expenses . . . . . . . . . . . . . . . . . . . . . 192,000 Net operating income . . . . . . . . . . . . . . . . . $ 48,000

The industry in which Success Company operates is quite sensitive to cyclical movements in the economy. Thus, profits vary considerably from year to year according to general economic con- ditions. The company has a large amount of unused capacity and is studying ways of improving profits.

Required:

New equipment has come on the market that would allow F rieden Company to automate a portion of its operations. Variable expenses would be reduced by $6 per unit. However, fixed expenses would increase to a total of $432,000 each month. Prepare two contribution format income statements, one showing present operations and one showing how operations would appear if the new equipment is purchased. Show an Amount column, a Per Unit column, and a Percent column on each statement. Do not show percentages for the fixed expenses.
Refer to the income statements in (1) above. For both present operations and the proposed new operations, compute ( a) the degree of operating leverage, ( b) the break-even point in dol- lars, and ( c ) the margin of safety in both dollar and percentage terms.
Refer again to the data in (1) above. As a manager, what factor would be paramount in your mind in deciding whether to purchase the new equipment? (Assume that ample funds are available to make the purchase.)
Refer to the original data. Rather than purchase new equipment, the marketing manager argues that the company’s marketing strategy should be changed. Instead of paying sales commissions, which are included in variable expenses, the marketing manager suggests that salespersons be paid fixed salaries and that the company invest heavily in

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ASSIGNMENT – BMAC5203

advertising. The marketing manager claims that this new approach would increase unit sales by 50% without any change in selling price; the company’s new monthly fixed expenses would be $240,000; and its net operating income would increase by 25%. Compute the break-even point in dollar sales for the company under the new marketing strategy. Do you agree with the marketing manager’s proposal?

[TOTAL: 25 MARKS]

TASK 2: Dropping or Retaining a Product

Henry Douglas is the owner and managing director of Heritage Furniture, Ltd., a South African company that makes museum-quality reproductions of antique outdoor furniture. Ms. Douglas would like advice concerning the advisability of eliminating the model C3 lawn- chair. These lawnchairs have been among the company’s best-selling products, but they seem to be unprofitable.

A condensed absorption costing income statement for the company and for the model C3 lawnchair for the quarter ended June 30 follows:

All Products

Model C3 Lawnchair

Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

R2,900,000

R300,000

Cost of goods sold:

Direct materials. . . . . . . . . . . . . . . . . . . . . . . . .

759,000

122,000

Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . .680,000

72,000

Fringe benefits (20% of direct labor) . . . . . . . . . . . .

. . .136,000

14,400

Variable manufacturing overhead . . . . . . . . . . . . . .

. . . .28,000

3,600

Building rent and maintenance . . . . . . . . . . . . . . . . .

. . . 30,000

4,000

Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . .75,000

19,100

Total cost of goods sold . . . . . . . . . . . . . . . . . . . . . . .

1,708,000

235,100

Gross margin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,192,000

64,900

Selling and administrative expenses:

Product managers’ salaries . . . . . . . . . . . . . . . . . . .

. . . 75,000

10,000

Sales commissions (5% of sales). . . . . . . . . . . . . . .

. . 145,000

15,000

Fringe beneftts (20% of salaries and commissions) .

. . . 44,000

5,000

Shipping. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . 120,000

10,000

General administrative expenses . . . . . . . . . . . . . . .

. . 464,000

48,000

Total selling and administrative expenses . . . . . . . . . . .

848,000

88,000

Net operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . .

. R344,000

R(23,100)

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ASSIGNMENT – BMAC5203

The currency in South Africa is the rand, denoted here by R.

The following additional data have been supplied by the company:

a. Direct labor is a variable cost.

b. All of the company’s products are manufactured in the same facility and use the same equipment. Building rent and maintenance and depreciation are allocated to products using various bases. The equipment does not wear out through use; it eventually becomes obsolete.

c. There is ample capacity to fill all orders.

d. Dropping the model C3 lawnchair would have no effect on sales of other product lines.

e. Work in process and finished goods inventories are insignificant.

f. Shipping costs are traced directly to products.

g. General administrative expenses are allocated to products on the basis of sales. There would be no effect on the total general administrative expenses if the model C3 lawnchair were dropped.

h. If the model C3 lawnchair were dropped, the product manager would be laid off.

Required:

Given the current level of sales, would you recommend that the model C3 lawnchair be dropped? Prepare appropriate computations to support your answer.
What would sales of the model C3 lawnchair have to be, at minimum, in order to justify retaining the product? Explain.
[TOTAL: 25 MARKS]

TASK 3: Cash budget

Natural Care Corp., a distributor of natural cosmetics, is ready to begin its third quarter, in which peak sales occur. The company has requested a $60,000, 90-day loan from its bank to help meet cash requirements during the quarter. Because Natural Care has experienced difficulty in paying off its loans in the past, the bank’s loan officer has asked the company to prepare a cash budget for the quarter. In response to this request, the following data have been assembled:

a. On July 1, the beginning of the third quarter, the company will have a cash balance of $43,000.

b. Actual sales for the last two months and budgeted sales for the third quarter follow (all sales are on account):

May (actual) . . . . . . . . . . . . . . . . . . . . . . . . . $360,000 June (actual) . . . . . . . . . . . . . . . . . . . . . . . . . $280,000

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ASSIGNMENT – BMAC5203

July (budgeted) . . . . . . . . . . . . . . . . . . . . . . . $350,000

August (budgeted) . . . . . . . . . . . . . . . . . . . . $420,000

September (budgeted) . . . . . . . . . . . . . . . . . $360,000

Past experience shows that 25% of a month’s sales are collected in the month of sale, 70% in the month following sale, and 2% in the second month following sale. The remainder is uncollectible.

c. Budgeted merchandise purchases and budgeted expenses for the third quarter are given below:

July

August

September

Merchandise purchases . . . . . . . . . . . .

$170,000

$155,000

$165,000

Salaries and wages . . . . . . . . . . . . . . .

$70,000

$70,000

$65,000

Advertising . . . . . . . . . . . . . . . . . . . . . .

$80,000

$90,000

$100,000

Rent payments . . . . . . . . . . . . . . . . . . .

$30,000

$30,000

$30,000

Depreciation . . . . . . . . . . . . . . . . . . . . .

$40,000

$40,000

$40,000

Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases on June 30, which will be paid during July, total $160,000.

d. Equipment costing $25,000 will be purchased for cash during July.

e. In preparing the cash budget, assume that the $60,000 loan will be made in July and repaid in September. Interest on the loan will total $2,000.

Required:

1. Prepare a schedule of expected cash collections for July, August, and September and for the quarter in total.

2. Prepare a cash budget, by month and in total, for the third quarter.

3. If the company needs a minimum cash balance of $20,000 to start each month, can the loan be repaid as planned? Explain.

[TOTAL: 25 MARKS]

TASK 4: Budgetary Control Systems

Facilitator Corp. is a company that acts as a facilitator in tax-favored real estate swaps. Such swaps, known as 1031 exchanges, permit participants to avoid some or all of the capital gains taxes that would otherwise be due. The bookkeeper for the company has been asked to prepare a report for the company to help its owner/manager analyze performance. The first such report appears below:

Facilitator Corp

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ASSIGNMENT – BMAC5203

Analysis of Revenues and Costs

For the Month Ended May 31

Planning Budget

Actual Unit

Variances

Unit Revenues

Revenues

and Costs

and Costs

Exchanges completed . . . . . . . .

20

25

Revenue . . . . . . . . . . . . . . . . . . .

$550

$500

$50 U

Expenses:

Legal and search fees . . . . . .

155

161

6 U

Office expenses . . . . . . . . . . .

209

172

37

F

Equipment depreciation . . . . .

30

24

6

F

Rent . . . . . . . . . . . . . . . . . . . .

75

60

15

F

Insurance . . . . . . . . . . . . . . . .

15

12

3

F

Total expense . . . . . . . . . . . . . . .

484

429

55

F

Net operating income . . . . . . . . .

$ 66 $

71 $

5

F

Note that the revenues and costs in the above report are unit revenues and costs. For example, the average office expense is $209 per exchange completed on the planning budget; whereas, the average actual office expense is $172 per exchange completed.

Legal and search fees is a variable cost; office expenses is a mixed cost; and equipment depre-ciation, rent, and insurance are fixed costs. In the planning budget, the fixed component of office expenses was $4,100.

All of the company’s revenues come from fees collected when an exchange is completed. Required:

1. Evaluate the report prepared by the bookkeeper.

2. Prepare a performance report that would help the owner/manager assess the performance of the company in May.

3. Using the report you created, evaluate the performance of the company in May.

[TOTAL: 25 MARKS]

——THIS IS THE END OF THE ASSIGNMENT—–

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