Question

The Business Situation

Namaste Company manufactures a unique yoga mat.  The company began operations December 1, 2018. Its accountant quit the second week of operations, and the company is searching for a replacement. The company has decided to test the knowledge and ability of all candidates interviewing for the position. Each candidate will be provided with the information below and then asked to prepare a series of reports, schedules, budgets, and recommendations based on that information. The information provided to each candidate is as follows.

Cost Items and Account Balances

Administrative salaries                                  $15,500

Advertising                                                        11,000

Cash, December 1                                               –0–

Depreciation on factory building                        1,500

Depreciation on office equipment                        800

Insurance on factory building                             1,500

Miscellaneous expenses—factory                      1,000

Office supplies expense                                        300

Professional fees                                                   500

Property taxes on factory building                        400

Raw materials used                                         70,000

Rent on production equipment                          6,000

Research and development                              10,000

Sales commissions                                           40,000

Utility costs—factory                                             900

Wages—factory                                                70,000

Work in process, December 1                            –0–

Work in process, December 31                          –0–

Raw materials inventory, December 1             –0–

Raw materials inventory, December 31           –0–

Raw material purchases                                  70,000

Finished goods inventory, December 1              –0–

Production and Sales Data

Number of mats produced                             10,000

Expected sales in units for December

  ($40 unit sales price)                                      8,000

Expected sales in units for January                10,000

Desired ending inventory                                20% of next month’s sales

Direct materials per finished unit                  1 kilogram

Direct materials cost                                      $7 per kilogram

Direct labor hours per unit                             .35

Direct labor hourly rate                                  $20

Cash Flow Data

Cash collections from customers: 75% in month of sale and 25% the following month.

Cash payments to suppliers: 75% in month of purchase and 25% the following month.

Income tax rate: 45%.

Cost of proposed production equipment: $720,000.

Manufacturing overhead and selling and administrative costs are paid as incurred.

Desired ending cash balance: $30,000.

Instructions

Using all the data presented above, do the following.

8. Compute the unit contribution margin and the contribution margin ratio.

9. Calculate the break-even point in units and in sales dollars.

10. Prepare the following budgets for the month of December 2018.

(a) Sales.

(b) Production.

(c) Direct materials.

(d) Direct labor.

(e) Selling and administrative expenses.

(f) Cash.

(g) Budgeted income statement.

11. Prepare a flexible budget for manufacturing costs for activity levels between 8,000 and

10,000 units, in 1,000-unit increments.

12. Identify one potential cause of direct materials, direct labor, and manufacturing overhead variances in the production of the helmet.

13. Determine the cash payback period on the proposed production equipment purchase, assuming a monthly cash fl ow as indicated in the cash budget (requirement 10f).

Answer 1

8)calculate unit contribution margin and contribution margin ratio

contribution margin per unit = sales per unit - variable expense per unit

   = 40 - (7+20)

= 13

contribution margin = no of units sold * contribution per unit

   = 8000*13

= 1,04,000

contribution margin ratio = sales - variable cost/ sales

   = 320000-(70000+70000)/320000*100

   = 56.25

9)break even points in units and in sales

break even point in units =

fixed cost = total cost of production - (variable cost per unit *no of units produced)

   = 7,20,000-(27*10,000)

= 4,50,000

break even points = fixed cost/ contribution per unit

   = 4,50,000/13

   = 34,615(in units)

break even points in sales = fixed cost/ contribution ratio

   = 4,50,000/56.25%

= 8,00,000

10a) sales budget for the month of december 2018

particulars	dec	jan
sale units	8000	10000
per unit	40	40
sales	3,20,000	4,00,000

b) production budget

particulars	dec
sales units	8000
+closing inventory 20% next months sales (10,000*20%)	2000
TOTAL PRODUCTION REQUIRED	10,000
_ OPENING INVENtory	0
units to be produced	10,000 units

c)direct material budget

particulars	dec
units to be produced(from production budget)	10,000 kg
direct material per unit	1kg
total direct material needed for production	10,000
+ desired ending direct material	0
-begining direct materials	0
direct materialpurchases kgs	10,000
cost per kg	7
cost of direct material purchses	70,000

d)direct labour budget

particulars	dec
units to be produced	10,000 units
direct labour per unit	0.35
total direct labour hours needed	3500
direct labour cost per hour	20
cost of labour	70,000

e)selling and administrative expense budget

particulars	decadvertising
administrative salaries	15,500
advertising	11000
office supplies expense	300
professional fee	500
sales commision	40,000
total	67300

f)cash budget

particulars	dec	jan
opening cash balance	0
receipts from customer(75% of sales in this month and 25% nxt month)	2,40,000 (3,20,000*75%)	80000 (320000*25%)
total cash available	2,40,000	80,000
payment to customer (75% of purchases in this month and 25% in following month)	(52500) (70000*75%)	17500 (70000*25%)
selling and administrative expense	(67,300)
insurance on factory building	(1500)
miscellaneous expense	(1000)
property tax on building	(400)
rent on production equipment	(6000)
research and development	(10,000)
utility cost	(900)
wages factory	(70,000)
total expense	(209600)
closing cash balance	30,400

g) budgeted income statement

particulars	amount	amount
sales		320000
cogs direct material direct labour(wages)    insurance on factory building miscellaneous on factory    utility cost	70,000 70,000 1500 900	(142400)
gross profit		1,10,400
operating expense selling expense and administrative expense administrative salaries    advertising    office supplies expense professional fee    sales commission	15,500 11,000 500 40,000	(67000)
non operating expense and income depriciation on factory building depreciation on office equipment property tax on factory building rent on production equipment research and development	1500 800 6000 10,000	(18,300)
net income		25100
income tax 45%		(11,295)
income after tax		13,805

11) flexible budget for manufacturing cost for dec from 8000 units to 10,000 units

particulars	8000 units	9000units	10000 units
manufacturing cost
direct material cost (a)	56000 (8000*7)	63000 (9000*7)	70000 (10,000*7)
direct labour per unit	0.35	0.35	0.35
direct labour hours	2800	3150	3500
direct labour per hour	20	20	20
direct labour cost(b)	56000 (2800*20)	63000 (3150*20)	70000 (3500*20)
total manufacturing cost(a+b)	112000	126000	140000