Operating Leverage

Question 1 CVP question Laila company has provided the following information about the company Sales $225,000 Sales Discount $20,000 Overhead cost (Fixed) $ 35,000  Overhead (Variable) $ 20,000 Sales Return /Allowance $2,500 Selling commission [variable ] $ 39,600 Supplies $2,600 Selling commission [fixed] $ 15,000 Prepaid expense $11,000 Variable admin expenses $ 24500 Accrued cost $7900 Fixed admin expenses $ 20,000 Tax 25% Interest expenses $5,420 Capacity of production 4,000 units Units sold 3,500 Units produced 3,500 Hint : all selling and admin costs are operating expenses REQUIRED 1. Calculate the net income using contribution approach 2. Calculate Net income using the absorption method [ Financial Accounting method] 3. Find CM per unit and the Contribution Margin Ratio 4. Determine the breakeven sales in units and dollars 5. Draw a graph to show the profit and lost and breakeven point for this company [BE graph] 6. Calculate margin of safety in dollars and in percentage . Explain what this concept means to a cost accountant. 7. The sales manager believes that a project of the company could increase sales by 25% but variable cost will also decrease by $5,000 and fixed cost will increase by $ 85,000. Should the company accept the project or reject ? 8. Determine the sales revenue necessary to generate before tax profit if the after tax is$75,000. The tax rate is 18% 9. Determine sales revenue necessary to generate after-tax profit of $85,000 . 10.Calculate degree of leverage [DOL] and if sales increases by 25%, what will be the increase or decrease in net income in $ of this company? What will be the total net income if the project is accepted [use original data in the beginning] QUESTION 2 ABC problem Company LSD LTD has 4 types of overhead . The four categories and expected costs for each category for next year are listed below Company LSD LTD Activity cost Setups cost $150,000 Inspection cost $90,000 Maintenance cost $120,000 Material Handling cost $ 82,000 Actual overhead Cost $30,000 Estimates for the proposed job [Job #23] are as follows Direct Materials $6,000 DL (1000 hours) $10,000 Machine Hours [maintenance cost] 500 # of material moves 12 # of setups 5 # of inspections 10 Units produced 240 The company has been asked to submit a bid for a proposed job. The plant manager thinks getting this job would result in new business in future years. Usually bids are based upon full manufacturing cost plus 30%. In the past , full manufacturing cost has been calculated by allocating overhead using volume based cost driver [[DLH]. The plant manager has heard of a new way of applying overhead that uses cost pools and cost drivers. Expected activity for the four activity based cost drivers that would be used are : Cost Drivers Machine Hours 15,000 Material Moves 4,600 Setups 3,500 Quality Inspections 5,000 Required : Part 1 1. Calculate the predetermined rates using the Functional based costing . 2. Determine the amount of overhead that would be applied to the proposed project if Functional based costing method is used 3. Determine the total cost of the proposed job using ABC 4. Calculate the unit cost using FBC 5. What bid price is the company going to use according to its FBC policy? Part 2 1 Calculate the predetermined rates using the activity based costing . 2 Determine the amount of overhead that would be applied to the proposed project if activity based drivers are used 3 Determine the total cost of the proposed job using ABC . 4 Calculate the unit cost using ABC. 5 What bid price is the company going to use according to its policy? 6 Has the company over-applied or under-applied using FBC and ABC? How did you come to this conclusion? Question 3. Theory Questions A. Differentiate between Functional based Costing and Activity based costing B. What are the weaknesses of Functional based costing ? C. Give two examples of unit level drivers and two examples of non-unit level drivers and give a brief explanation for each. D. Mention three assumptions of CVP analysis E. Explain what the following measures indicate to the managers: i. Margin of Satety ii. Degree of Operating Leverage

ACC 320
Question 1
CVP question
Laila company has provided the following information about the company
Sales $225,000
Sales Discount $20,000
Overhead cost (Fixed) $ 35,000
Overhead (Variable) $ 20,000
Sales Return /Allowance $2,500
Selling commission [variable ] $ 39,600
Supplies $2,600
Selling commission [fixed] $ 15,000
Prepaid expense $11,000
Variable admin expenses $ 24500
Accrued cost $7900
Fixed admin expenses $ 20,000
Tax 25%
Interest expenses $5,420
Capacity of production 4,000 units
Units sold 3,500
Units produced 3,500
Hint : all selling and admin costs are operating expenses
REQUIRED
1. Calculate the net income using contribution approach
2. Calculate Net income using the absorption method [ Financial
Accounting method]
3. Find CM per unit and the Contribution Margin Ratio
4. Determine the breakeven sales in units and dollars
5. Draw a graph to show the profit and lost and breakeven point for this
company [BE graph]
6. Calculate margin of safety in dollars and in percentage . Explain what
this concept means to a cost accountant.
7. The sales manager believes that a project of the company could
increase sales by 25% but variable cost will also decrease by $5,000
and fixed cost will increase by $ 85,000. Should the company accept
the project or reject ?
8. Determine the sales revenue necessary to generate before tax profit
if the after tax is$75,000. The tax rate is 18%
9. Determine sales revenue necessary to generate after-tax profit of
$85,000 .
10.Calculate degree of leverage [DOL] and if sales increases by 25%,
what will be the increase or decrease in net income in $ of this
company? What will be the total net income if the project is
accepted
[use original data in the beginning]
QUESTION 2
ABC problem
Company LSD LTD has 4 types of overhead . The four categories and
expected costs for each category for next year are listed below
Company LSD LTD
Activity cost
Setups cost $150,000
Inspection cost $90,000
Maintenance cost $120,000
Material Handling cost $ 82,000
Actual overhead Cost $30,000
Estimates for the proposed job [Job #23] are as follows
Direct Materials $6,000
DL (1000 hours) $10,000
Machine Hours [maintenance cost] 500
# of material moves 12
# of setups 5
# of inspections 10
Units produced 240
The company has been asked to submit a bid for a proposed job. The plant
manager thinks getting this job would result in new business in future
years. Usually bids are based upon full manufacturing cost plus 30%.
In the past , full manufacturing cost has been calculated by allocating
overhead using volume based cost driver [[DLH]. The plant manager has
heard of a new way of applying overhead that uses cost pools and cost
drivers.
Expected activity for the four activity based cost drivers that would be used
are :
Cost Drivers
Machine Hours 15,000
Material Moves 4,600
Setups 3,500
Quality Inspections 5,000
Required :
Part 1
1. Calculate the predetermined rates using the Functional based costing
. 2. Determine the amount of overhead that would be applied to the
proposed project if Functional based costing method is used
3. Determine the total cost of the proposed job using ABC
4. Calculate the unit cost using FBC
5. What bid price is the company going to use according to its FBC
policy?
Part 2
1 Calculate the predetermined rates using the activity based costing .
2 Determine the amount of overhead that would be applied to the
proposed project if activity based drivers are used
3 Determine the total cost of the proposed job using ABC .
4 Calculate the unit cost using ABC.
5 What bid price is the company going to use according to its policy?
6 Has the company over-applied or under-applied using FBC and ABC?
How did you come to this conclusion?
Question 3.
Theory Questions
A. Differentiate between Functional based Costing and Activity
based costing
B. What are the weaknesses of Functional based costing ?
C. Give two examples of unit level drivers and two examples of
non-unit level drivers and give a brief explanation for each.
D. Mention three assumptions of CVP analysis
E. Explain what the following measures indicate to the managers:
i. Margin of Satety
ii. Degree of Operating Leverage