Question

1. Sharks Ltd operates in the entertainment industry and one of its activities is to promote entertainment events throughout East Malaysia. The company is examining the viability of a fund-raising concert in Sabah. Estimated fixed costs are RM180,000. These include the fees paid to performers, the hire of the venue and advertising costs. Variable costs consist of the cost of a pre-packed buffet which will be provided by a firm of caterers at a price, which is currently being negotiated, but it is likely to be in the region of RM10 per ticket sold. The proposed price for the sale of a ticket is RM30. The management of Sharks Ltd has requested the following information: -

a. The number of tickets that must be sold to breakeven.?                            

b. How many tickets must be sold to earn RM60,000 target profit?

c.What profit would result if 10,000 tickets were sold?                   

d. What selling price would have to be charged to give a profit of RM60,000 on sales of 10,000 tickets, fixed costs of RM180,000 and variable costs of RM10 per ticket?

e. What is the profit-volume ratio?                                                       

f.With reference to part (a), what is the margin of safety given expected sales of 10,000 tickets?                 

g. Discuss ONE (1)advantage of managers possessing knowledge of the cost-volume-profit analysis.                 

                     

2. Wee Ltd, produces a single product in one of its factory. For control and measurement purposes, a standard costing system was recently introduced and is now in operation.

The standards set for the month of July were as follows:  

Production and sales                                                     16,000 units

Selling price (per unit)                                   RM140

Materials:

Material XX                                                                        6 kgs per unit at RM12.25 per kilogramme

Material YY                                                                         3 kgs per unit at RM3.20 per kilogramme

Manpower                                                                         4.5 hours per unit at RM8.40 per hour  

Fixed overheads are at RM86,400 per month.

The actual data for the month of July are as follows:

- Produced 15,400 units, which were sold at RM138.25 each.

- Materials              :Used 98,560 kgs of material XX at a total cost of RM1,256,640.

                                    :Used 42,350 kgs of material YY at a total cost of RM132,979.

- Labour                   :Paid an actual rate of RM8.65 per hour to the labour force. The total
                                    amount paid out amounted to RM612,766.

- Fixed overheads costs RM96,840.  

Required:

(a) Calculate the actual and budgeted profits for the month of July based on the marginal costing system.                                                                                                                                                             

(b) Calculate the following variances: -                                                                 

Material price and usage variances;

Labour rate and efficiency variances;

Fixed overhead expenditure variance; and

Sales margin price and volume variances.

(c) Prepare a statement reconciling the actual with the budgeted profit or loss figure based on your answers in (b) above.                                                                       

(d) Referring to part (b), how would you explain the possible reasons for the variances?
                                              

3. BeBright Co., a wholesaler, sells its products to retailers throughout Kuala Lumpur. The company has adopted a regional structure with each region consisting of 2 sales territories. Each region has its own regional office and a warehouse which distributes the goods directly to the customer. Each sales territory also has an office where the sales and marketing staffs are located. In the Cheras region as well there are 2 sales territories with offices located in Connaught Gardens and Midah Gardens. The budgeted results for the next 3 months are as follows: -

                                                                                                Connaught          Midah                   Total     
                                                                                                (RM000s)             (RM000s)             (RM000s)            
Cost of goods sold                                                            1,600                     1,000                     2,600

Marketing / salespersons’ salaries                              300                         240                         540

Sales office rent                                                                            150                            120                         270

Depreciation of sales office equipment               50                                40                           90

Allocation of warehouse rent                                        48                           24                           72

Depreciation of warehouse equipment                38                                22                           60

Regional &headquarter’s costs:
Avoidable costs                                                                                272                        186                             458

Unavoidable costs                                                                          760                            340                      1,100                    
Total costs assigned to each location                      3,218                     1,972                     5,190

Reported profit / (loss)                                                                       382                         (272)                        110                     
Sales                                                                                               3,600                     1,700                     5,300                    

The company is evaluating whether it should discontinue Midah Gardens sales office as it is not profitable. Assuming that the above results are likely to be typical of future quarterly performance, should the company discontinue this sales territory?

Required:

a. State which of the above costs are relevant and irrelevant. Why?                 

b. Analyse the relevant costs related to keeping or discontinuing the Midah Gardens sales office. What should the company do (keep or discontinue Midah Gardens)?               

c. What are TWO (2) qualitative factors that the company should consider in making its final decision?

4. A Co. and B Co. are competitors in a particular manufacturing sector. An extract of financial statements for each company is as follows: Use them in a ratio analysis that compares the companys’ financial leverage and profitability.

                 Item                                                                               A Co.            B Co.

Total assets                                                        RM10,000,000    RM10,000,000

Total equity (all common)                                    9,000,000     5,000,000

Total debt                                                              1,000,000          5,000,000

Annual interest                                                 100,000                 500,000

Total sales                                                                 25,000,000     25,000,000

EBIT                                                                       6,250,000             6,250,000

Earnings available for

common stockholders                  3,690,000             3,450,000

Required:

Calculate the following debt and coverage ratios for the two companies. Discuss briefly their financial risk and ability to cover the costs in relation to each other.

a. Debt ratio.                                                                                                       

b. Times interest earned ratio.       

c. Calculate the following profitability ratios for the two companies. Discuss briefly their profitability relative to each other.

d. Operating profit margin.                                                                                             

e. Net profit margin.                                                                                                      

f. Return on total assets.                                                                                               

g. Return on common equity.                     

h. In what way has the larger debt of B Co. made it more profitable than A Co.? What are the risks that B Co.’s investors undertake when they choose to purchase its stock instead of A Co.’s?                                                                                                                          

       i. “While ratio analysis can provide some useful information concerning a company’s operations and financial condition, it does have limitations”. Discuss briefly.         

Answer 1

		RM
a	Selling price per ticket	30
	Less: Variable cost per ticket	(10)
	Contribution Margin per ticket	20
	Total fixed costs	180,000
	Breakeven number of tickets ( RM 180,000 / RM 20 )	9,000	Number of tickets
b	Target profit	60,000
	Add : Fixed costs	180,000
	Required contribution margin	240,000
	Contribution Margin per ticket	20
	Number of ticket to be sold to earn target profit ( 240,000/ 20)	12,000	Number of tickets
c	Contribution Margin per ticket ( RM )	20
	Number of tickets sold ( units)	10,000
		RM
	Total contribution margin ( 10,000 tickets x RM 20 )	200,000
	Less: Fixed costs	(180,000)
	Profit	20,000
d	Target profit	60,000
	Add : Fixed costs	180,000
	Required contribution margin	240,000
	Number of tickets sold ( units)	10,000
	Target contribution margin per unit ( RM 240,000/ 10,000 units)	24
	Add: Variable cost per ticket	10
	Target selling price per ticket	34
e	Profit volume ratio = contribution margin/ selling price = ( 20/30 ) = 66.67%
f	Total number of ticket sold	10,000
	Less: Breakeven sales (a)	(9,000)
	Margin of safety number of tickets	1,000