Contribution Margin, Break-Even Sales, Cost-Volume-Profit Chart, Margin of Safety, and Operating Leverage

Belmain Co. expects to maintain the same inventories at the end of 20Y7 as at the beginning of the year. The total of all production costs for the year is therefore assumed to be equal to the cost of goods sold. With this in mind, the various department heads were asked to submit estimates of the costs for their departments during the year. A summary report of these estimates is as follows:

It is expected that 12,000 units will be sold at a price of $240 a unit. Maximum sales within the relevant range are 18,000 units.

Required:

1. Prepare an estimated income statement for 20Y7.

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1. Use the absorption costing format.

Learning Objective 2, Learning Objective 3, Learning Objective 4, and Learning Objective 5.

2. What is the expected contribution margin ratio?
%

3. Determine the break-even sales in units and dollars.

4. Construct a cost-volume-profit chart on your own paper. What is the break-even sales?
$1,920,000

5. What is the expected margin of safety in dollars and as a percentage of sales?

6. Determine the operating leverage.

Answers for e, f, g and h please.

A competitive firm uses two inputs, capital (?) and labour (?), to produce one output, (?). The price of capital, ??, is $1 per unit and the price of labor, ?? , is $1 per unit. The firm operates in competitive markets for outputs and inputs, so takes the prices as given. The production function is ?(?, ?) = 3? 0.25? 0.25. The maximum amount of output produced for a given amount of inputs is ? = ?(?, ?) units.

a) Use the method of Lagrange to find the conditional factor demands for cost minimization. [8 marks]

b) Find the firm’s cost function. [2 marks]

c) Would you call this a short-run cost function or a long-run cost function? Explain why. [1 mark]

d) Write the equations for the firm’s average cost function and marginal cost function. [2 marks]

e) Draw the firm’s total cost function, average cost function, and marginal cost function on a diagram. Clearly label the axes, the curves, and any key points on the graph (eg., axis intercepts, curve intersections, and minimums) with the numbers specifying the exact prices and quantities at these points. What are the coordinates of the points where the average cost curve and marginal cost curve intersect with the total cost curve? [6 marks]

f) Does your graph indicate increasing, decreasing, or constant returns to scale? Explain. [1 mark] Hint: Think about the relationship between the total cost function and returns to scale.

g) Show the firm’s long-run supply function on your diagram and write a supply function for the firm. [2 marks]

h) Using your supply function, find the profit maximising quantity if the price of output ? = 4. What price would be needed for the firm to supply 18 units of output? [2 marks]

1. One of the company's perfumers has created a new fragrance and the company is studying the production and marketing of this innovation on a large scale. The company will rent a factory for 16,000 riyals per month for production purposes. This manufacturer has already taken an advanced course in perfume composition to help him create fragrances. The course cost was 15,000 riyals. The company will pay a bill for renting and insuring the production equipment at a monthly cost of 8,000 riyals. The company has estimated the following costs: direct materials per unit will be 25 riyals and direct labor will be 20 riyals per unit. Time to be spent promoting the perfume will cost 12,600 riyals per month. In addition, 20,000 riyals of the salary of the existing sales manager will be allocated to the fragrance

You are required to classify the costs related to producing this fragrance by completing the table below by placing an "X" in a box that matches a cost item to the appropriate cost classifications. A cost item may be classified under more than one classification and in that case, you may place more than one "X" for those cost items. Similar, cost classifications may include more than one cost item, in which case those cost classifications may have more than one “X”. For example, cost may be a sunk cost and at the same time a manufacturing overhead cost, and so there will be an "X" placed under each of these classification against the cost.

2) Explain the reasons behind your classifications in requirement 1. Justify your answers.

3) The Company is expected to produce 16,000 bottles of the perfume. In accordance to the information provided on requirement 1, you are required to calculate the following values with the equations clearly written in the report:

3.1 What is the value of the total conversion cost? Show your work

3.2 What is the value of the total cost of production? Show your work

3.3 What is the value of the total period costs? Show your work

1. The demand for aloe vera hand lotion, one of numerous products manufactured by Smooth Skin Care Products Inc., has dropped sharply because of recent competition from a similar product. The company's chemists are currently completing tests of various new formulas, and it is anticipated that the manufacture of a superior product can be started on December 1, one month in the future. No changes will be needed in the present production facilities to manufacture the new product because only the mixture of the various materials will be changed.

   The controller has been asked by the president of the company for advice on whether to continue production during November or to suspend the manufacture of aloe vera hand lotion until December 1. The controller has assembled the following pertinent data:

   Smooth Skin Care Products Inc. Income Statement—Aloe Vera Hand Lotion For the Month Ended October 31
   Sales (400,000 units)	$32,000,000
   Cost of goods sold	28,330,000
   Gross profit	$3,670,000
   Selling and administrative expenses	4,270,000
   Loss from operations	$(600,000)

   The production costs and selling and administrative expenses, based on production of 400,000 units in October, are as follows:

   Direct materials	$15	per unit
   Direct labor	17	per unit
   Variable manufacturing cost	35	per unit
   Variable selling and administrative expenses	10	per unit
   Fixed manufacturing cost	$1,530,000	for October
   Fixed selling and administrative expenses	270,000	for October

   Sales for November are expected to drop about 20% below those of the preceding month. No significant changes are anticipated in the fixed costs or variable costs per unit. No extra costs will be incurred in discontinuing operations in the portion of the plant associated with aloe vera hand lotion. The inventory of aloe vera hand lotion at the beginning and end of November is expected to be inconsequential.

   Required:

   1. Prepare an estimated income statement in absorption costing form for November for aloe vera hand lotion, assuming that production continues during the month.

   Smooth Skin Care Products Inc.
   Estimated Income Statement—Absorption Costing—Aloe Vera Hand Lotion
   For the Month Ending November 30
   Contribution margin Direct labor Gross profit Manufacturing margin Sales		$
   Cost of goods sold:
   Cost of goods manufactured Direct materials Fixed selling and administrative expense Total cost of goods sold Variable selling and administrative expense	$
   Direct labor Cost of goods manufactured Fixed selling and administrative expense Sales Variable selling and administrative expense
   Fixed cost of goods manufactured Fixed selling and administrative expense Sales Variable manufacturing cost Variable selling and administrative expense
   Fixed manufacturing cost Gross profit Sales Variable selling and administrative expense Total cost of goods sold
   Cost of goods manufactured Direct labor Direct materials Manufacturing margin Total cost of goods sold
   Fixed manufacturing cost Gross profit Manufacturing margin Sales Variable cost of goods manufactured		$
   Selling and administrative expenses:
   Cost of goods manufactured Direct materials Total cost of goods sold Variable cost of goods manufactured Variable selling and administrative expenses	$
   Fixed cost of goods manufactured Fixed direct labor Fixed direct materials Fixed selling and administrative expenses Variable cost of goods manufactured
   Fixed cost of goods manufactured Fixed direct labor Fixed direct materials Total selling and administrative expenses Variable cost of goods manufactured
   Operating income Loss from operations		$

   2. Prepare an estimated income statement in variable costing form for November for aloe vera hand lotion, assuming that production continues during the month.

   Smooth Skin Care Products Inc.
   Estimated Income Statement—Variable Costing—Aloe Vera Hand Lotion
   For the Month Ending November 30
   Contribution margin Direct labor Gross profit Manufacturing margin Sales		$
   Variable cost of goods sold:
   Contribution margin Cost of goods sold Direct materials Fixed selling and administrative expense Variable selling and administrative expense	$
   Contribution margin Direct labor Fixed selling and administrative expense Sales Variable selling and administrative expense
   Fixed cost Fixed selling and administrative expense Sales Variable manufacturing cost Variable selling and administrative expense
   Fixed cost Fixed selling and administrative expense Sales Total variable cost of goods sold Variable selling and administrative expense
   Contribution margin Fixed manufacturing cost Inventory, October 31 Manufacturing margin Sales		$
   Cost of goods manufactured Direct labor Direct materials Inventory, October 31 Variable selling and administrative expenses
   Contribution margin Direct labor Direct materials Inventory, October 31 Manufacturing margin		$
   Fixed costs:
   Fixed direct labor Fixed manufacturing cost Fixed sales Total variable cost of goods sold Variable cost of goods manufactured	$
   Fixed cost of goods manufactured Fixed direct labor Fixed selling and administrative expenses Variable cost of goods manufactured Variable selling and administrative expenses
   Fixed cost of goods manufactured Fixed direct labor Total fixed costs Variable cost of goods manufactured Variable selling and administrative expenses
   Operating income Loss from operations		$

   3. What would be the estimated loss in income from operations if the aloe vera hand lotion production were temporarily suspended for November?
   $

   4. What advice should the controller give to management?

   Production of A.V. lotion should be

   • continued
   • discontinued
   . Temporary suspension of production would result in an operating loss of
   • $840,000
   • $1,800,000
   compared with an operating loss of
   • $840,000
   • $1,800,000
   if production is continued. The result would be a savings of
   • $840,000
   • $960,000
   .

Weighted Average Cost Method with Perpetual Inventory

The beginning inventory at Midnight Supplies and data on purchases and sales for a three-month period ending March 31, are as follows:

Required:

1. Record the inventory, purchases, and cost of merchandise sold data in a perpetual inventory record similar to the one illustrated in Exhibit 5, using the weighted average cost method. Round unit cost to two decimal places, if necessary.

2. Determine the total sales, the total cost of merchandise sold, and the gross profit from sales for the period.

3. Determine the ending inventory cost as of March 31.
$fill in the blank 75

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1. When the perpetual inventory system is used, revenue is recorded each time a sale is made along with an entry to record the cost of the merchandise sold. Under the weighted average method the average unit cost must be determined after each purchase by dividing the total of cost of merchandise on hand by the total units on hand. The cost of merchandise sold is computed by multiplying the average unit cost on the date of sales by the units sold. The inventory balance after a sale is computed by multiplying the average unit cost by the units on hand.

2. Total sales are obtained by taking the number of units sold times their sale prices for all sales and adding these amounts together. The total cost of merchandise sold can be obtained by adding the costs in the perpetual inventory record. Sales minus cost of merchandise sold equals gross profit.

3. The ending inventory cost can be taken from the perpetual inventory record in Part (1).

James, a buyer at EZ Tech, a Alaska-based purveyor of generators for people in remote areas, was doing some number crunching. EZ Tech was reevaluating its suppliers for a key component of the generator, the generator frame. After some extensive evaluation, James had narrowed it down to two suppliers and he would source from the one with the lowest total cost, everything else held equal. Given the following information, use total cost analysis to determine which supplier, is more cost-effective for EZ Tech. Late delivery of the generator frame results in either a lost sale (thus lost profit) or a customer backorder (each time there is a backorder, it costs $195). Assume for the cost comparison that order quantity is 2,800 units and that the annual requirement (forecast) is 74,000 units. For purposes of calculating quality problems, James uses the expected invoice amount as a base. What should James do? Enter as ###,###. Enter negative numbers as -###,###.

If you are not going to answer all the questions. then do not answer any.

3.) The following information concerns production in the Baking Department for March. All direct materials are placed in process at the beginning of production.

a. Based on the above data, determine each cost listed below. Round "cost per equivalent unit" answers to the nearest cent.

b. Assuming that the direct materials cost is the same for February and March, did the conversion cost per equivalent unit increase, decrease, or remain the same in March?

4.) The debits to Work in Process—Roasting Department for Morning Brew Coffee Company for August, together with information concerning production, are as follows:

All direct materials are placed in process at the beginning of production.

a. Prepare a cost of production report, presenting the following computations:

1. Direct materials and conversion equivalent units of production for August
2. Direct materials and conversion costs per equivalent unit for August
3. Cost of goods finished during August
4. Cost of work in process at August 31

If an amount is zero, enter in "0". For the cost per equivalent unit, round your answer to two decimal places.

b. Compute and evaluate the change in cost per equivalent unit for direct materials and conversion from the previous month (July). If required, round your answers to the nearest cent.

Q.3 ABC manufacturing company set up the following standard cost for the forthcoming period for its product. Standard cost card. Direct Material (2kg @ Rs.3.00 per kg)…………… .Rs.6.00 Direct Labor (2 hours @ Rs.4 per hour)……………...8.00 Variable overhead (@ Rs.3 per direct labor hour)….........6.00 Fixed overhead (@ Rs.2. per direct labor hour)..……..…4.00 Total production cost per unit……………………… 24.00 Profit………………………………………………...........6.00 Selling price………………………... …………………..30.00 Budgeted production and sales estimated…………….20,000 units Actual results for the period were as under: -Actual production and sales were 15,000 units @ 31.00 -Direct material purchased and used 31,500kg @ Rs.2.95 per kg -Direct wages paid 29,500 hours @ R.4.15 per hour. -Variable overhead incurred………………Rs.100,000 -Fixed overhead incurred ………………. .Rs.75,000 Required: Compute and identify the person responsible for these variances (Marks-10) a. Material Variances (price, quantity and total variances) b. Labor variance (rate, efficiency and total variances) c. Variable overhead variances (spending (expenditure), efficiency and total variances) d. Fixed overhead variances (expenditure (budget), volume and total variances) e. Sales variances (price, quantity and total variance)