Question

1. You have been asked to assist Brandon Manufacturing Inc. prepare for an upcoming end-of-year meeting, since its accountant quit without notice.  The following information for the year ended December 31, 2020 was prepared by the President’s secretary, who, trying to be helpful, has alphabetized the list:

                        Administrative staff salaries                                                 52,000

Advertising and promotion                                                   31,000

Bad debt expense                                                                    4,000

Commission expense - salespersons                                 88,000

Depreciation - factory buildings                                           16,850

Depreciation - sales office                                                      7,700

Finished goods inventory - start of year                               8,500

Finished goods inventory - end of year                                6,100

Indirect materials used                                                            4,800

Insurance expense – factory buildings                                 3,400

Insurance expense – sales vehicles                                     6,300

Property taxes - factory                                                        21,900

Property taxes - sales office                                                   4,100

Purchases - raw materials                                                    87,000

Raw materials inventory - start of year                                5,000

Raw materials inventory - end of year                                  3,500

            Rent - production equipment                                               26,070

Repairs & maintenance - factory equipment                       2,800

Repairs & maintenance - sales office equipment               3,060

Salaries - factory supervisor                                                92,000

Travel and entertainment expenses                                 112,000

Utilities – factory                                                                     14,600

Utilities – sales office                                                               9,850

Wages and benefits - factory workers                              169,000

Work-in-process inventory - start of year                           14,200

Work-in-process inventory - end of year                            18,900

Required:     

12        a)  Prepare EITHER a combined schedule of cost of goods manufactured and cost of goods sold for the year ended December 31, 2020  OR separate schedules for cost of goods manufactured and cost of goods sold, in good form.  Use actual manufacturing overhead costs incurred.

4         b) What would the cost of goods manufactured be if manufacturing overhead was applied using a predetermined overhead rate of $11.75 per machine hour, and total machine hours were 16,000 during the year? Prepare the journal entry to dispose of the over- or under-applied overhead, assuming it is all allocated to Cost of Goods Sold and two separate T accounts are used for Manufacturing overhead.

  1        c)  What would the ending work-in-process inventory be if cost of goods manufactured was $180,000 and all other information remained the same?

Sales revenue	$540,000
Variable expenses	360,000
Contribution margin	180,000
Fixed costs	100,000
Operating income	$  80,000

2.  Bradjoli Inc. produces a single product.  The results of operations for a typical month are as follows:

The company produced and sold 120,000 kgs of product during the month, and there were no beginning or ending inventories.  Bradjoli pays income tax at a rate of 25%.

            Required:

            a) At the typical sales volume, calculate:

3                    i) the breakeven point is units sold and in sales dollars.

2                    ii) the margin of safety as a percentage.

3                    iii) the operating leverage. Using the operating leverage, determine the operating profit that Bradjoli would report if sales were to increase 40%.

4        b) Compute the target sales in units and sales dollars if Bradjoli wants to earn an after-tax profit of $162,000.  

1                    i) At this sales volume, what is the operating leverage?

1                    ii) At this sales volume, determine the operating profit that Bradjoli would report if sales were to increase 40%.

4        c)  Using the typical month’s operating results as the starting point, calculate the breakeven point if Bradjoli plans to invest in automation with a monthly fixed cost of $25,000 and expects this will reduce variable expenses by $0.50 per unit.  Do you recommend the company undertake this investment?  Why or why not?

Answer 1

12 a)

COST OF GOODS MANUFACTURED &COST OF GOODS SOLD
BEGINNING WIP				14200
TOTAL MANUFACTURING COST		440180
ENDING WIP				-18900
COST OF GOODS MANUFACTURED		435480
BEG. FINISED GOODS			8500
ENDING FINISHED GOODS			-6100
COST OF GOODS SOLD			437880

MANUFACTURING COST
DM USED	88500
DL	169000
MOH	182680
TOTAL	440180

DM USED
BEG. BAL	5000
PURCHASES	87000
END. BAL	3500
		88500

MOH
DEPRECIATION FACTORY BUILDING	16850
INDIRECT MATERIAL			4800
INSURANCE EXPENSE-FACTORY BUILDING	3400
PROPERTY TAXES -FACTORY		21900
RENT- PRODUCTION EQUIPMENT	26070
REPAIR &MAINTAINANCE FACTORY EQUIPMENT			3060
SALARY-FACTORY SUPERVISOR	92000
UTILITIES FACTORY			14600
TOTAL			182680

4 b)

COST OF GOODS MANUFACTURED
BEGINNING WIP				14200
TOTAL MANUFACTURING COST		445500
ENDING WIP				-18900
COST OF GOODS MANUFACTURED		440800

W/N:

MANUFACTURING COST
DM USED	88500
DL	169000
MOH	188000 (11.75*16000)
TOTAL	445500

JOURNAL ENTRY TO RECORD DISPOSITION OF OVER APPLIED OVERHEAD

OVERAPPLIED OVERHEAD =

5320

(188000-182680)

Journal entry:

				Dr	Cr
FACTORY OVERHEAD APPLIED		188000
FACTORY OVERHEAD INCURRED		182680
COST OF GOODS SOLD			5320

1c)

TOTAL MANUFACTURING COST	440180
BEG. WIP			14200
COST OF GOODS MANUFACTURED	-180000
END.WIP			274380

2 a)

3 I)

BREAKEVEN POINT IN UNITS =	FIXED COST / C.M PER UNIT
FIXED COST =	100000
C.M PER UNIT=	1.5	(180000/120000=1.5)
B.E.P =		100000/1.5
		66667 KG

BREAKEVEN POINT IN SALES	FIXED COST/CONTRIBUTION MARGIN RATIO
FIXED COST =	100000
CMR =	33.33%	(180000/540000 *100)
BEP IN SALES =	100000/.3333
	$300000

3 ii)

MARGIN OF SAFETY (%)
BEP =	66667 KG
ACTUAL SALES =	120000 KG
MOS =	BEP/ACTUAL OR PLANNED SALES*100
	66667/120000*100
	55.56%

3 iii)

DEGREE OF OPERATING LEVERAGE =		CM/EBIT
CM		180000
EBIT		80000
DOL		18000/80000
		2.25 Times
% CHANGE IN PROFIT		2.25*40%
		90%
OPERATING PROFIT		$152000 ( 80000+90%)

4 b)

BREAKEVEN POINT IN UNITS=   (FIXED COST+BEFORE TAX PROFIT) / C.M PER UNIT
FIXED COST =	100000
BEFORE TAX PROFIT	216000	162000*100/75
CM PER UNIT =	1.5	180000/120000
B.E.P =	(100000+216000)/1.5
	210667 KG

BREAKEVEN POINT IN SALES =	FIXED COST+ BEFORE TAX PROFIT/CONTRIBUTION MARGIN RATIO
BEFORE TAX PROFIT=	216000	(162000*100)/75
FIXED COST =	100000
CMR	33.33%	180000/540000
BEP IN SALES =	(100000+216000)/.3333
	$948000

1 i)

DEGREE OF OPERATING LEVERAGE =	CM/EBIT
CM	316000	210667*1.5
EBIT	216000
DOL	316000/216000
	1.46 times//

1 ii)

DEGREE OF OPERATING LEVERAGE =	CM/EBIT
CM	316000	210667*1.5
EBIT	216000
DOL	316000/216000
	1.46 times
% CHANGE IN PROFIT	1.46*40%
	59%
OPERATING PROFIT	$343440	216000+59%

4 c)

BREAKEVEN POINT IN UNITS= FIXED COST+ADDITONAL FIXED COST / C.M PER UNIT
FIXED COST =	100000
ADDITIONAL FIXED COST	25000
CM PER UNIT =	2	(1.5+.5)
B.E.P =	(100000+25000)/2
	62500 KG

Yes i recommend the Company to undertake this investment because the company is required to produce only 62500 kg of goods to meet all its fixed cost obligations.This is less than the beforehand calculated BEP of 66667 kg without additional investment.Any production above 62500kg will result in profit for the company.