ASSIGNMENT MEMORANDUM. QUESTION 1 Suggested solution [25]

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Page 1 of 10 PLEASE NOTE: = 1 mark ½ = half a mark ASSIGNMENT MEMORANDUM SUBJECT : NAGEMENT ACCOUNTING () ASSIGNMENT : 1 ST SEMESTER 2012 QUESTION 1 Suggested solution [25] 1. The CM ratio is 30%.

1 Page 1 of 10 PLEASE NOTE: = 1 mark ½ = half a mark ASSIGNMENT MEMORANDUM SUBJECT : NAGEMENT ACCOUNTING () ASSIGNMENT : 1 ST SEMESTER 2012 QUESTION 1 Suggested solution [25] 1. The CM ratio is 30%. Total Per Unit Percent of Sales Sales (19,500 units)... R585,000 R % Variable expenses , Contribution margin... R175,500 R % The break-even point is: Sales = Variable expenses + Fixed expenses + Profits R30.00Q = R 21.00Q + R180,000 + R0 R9.00Q = R180,000 Q = R180,000 R9.00 per unit Q = 20,000 units 20,000 units R30.00 per unit = R600,000 in sales. Alternative solution for BEP: BEP in units = Fixed Costs Unit contribution margin = R R9 per unit = units BEP (R) = Fixed expense CM Ratio = R = R in sales OR BEP (R) = units x R30 per unit = R (5)

2 Page 2 of Sales (39,000 R27.00 per unit*)... R1,053,000 Variable expenses (39,000 R21.00 per unit)... (819,000) Contribution margin ,000 Fixed expenses (R180,000 + R60,000)... (240,000) Net operating loss... R (6,000) *R30.00 (R ) = R27.00 (5) 3. Sales = Variable costs + Fixed costs + Profits R30.00Q = R21.75Q* + R180,000 + R9,750 R8.25Q = R189,750 Q = R189,750 R8.25 per unit Q = 23,000 units *R R0.75 = R21.75 Alternative solution: Unit sales to attain target profit = Fixed Costs + Target profit CM per unit = R R9 750 R8.25 per unit** = units **R30.00 R21.75 = R8.25 (5) 4. a) The new CM ratio would be: Per Unit Percent of Sales Sales... R % Variable expenses Contribution margin... R %

3 Page 3 of 10 The new break-even point would be: BEP in units = Fixed Costs Unit contribution margin = R R R12 per unit = units BEP (R) = Fixed expense CM Ratio = R R = R in sales OR BEP (R) = units x R30 per unit = R (3) b. Comparative income statements follow: Not Automated Automated Per Per Total Unit Total Unit Sales (26,000 units)... R780,000 R30.00 ½ R780,000 R30.00 ½ Variable expenses , , Contribution margin ,000 R ,000 R12.00 Fixed expenses ,000 *given 252,000 Net operating income... R 54,000 ½ R 60,000 ½ (5) c. The proposed changes would increase the company s fixed costs and its breakeven point. However, the changes would also increase the company s CM ratio (from 0.30 to 0.40). The higher CM ratio means that once the break-even point is reached, profits will increase more rapidly than at present. If 26,000 units are sold next month, for example, the higher CM ratio will generate R6,000 more in profits than if no changes are made. The greatest risk of automating is that future sales may drop back down to present levels (only 19,500 units per month), and as a result, losses will be even larger than at present due to the company s greater fixed costs. (Note the problem states that sales are erratic from month to month.) In sum, the proposed changes will help the company if sales continue to trend upward in future months; the changes will hurt the company if sales drop back down to or near present levels. [Yes and 1 mark for any relevant justification. ] (2)

4 Page 4 of 10 QUESTION 2 Suggested solution [25] 1. Schedule of expected cash collections: (3) January February March Quarter Cash sales... 80,000 * 120,000 ½ 60,000 ½ 260,000 ½ Credit sales ,000 * 320,000 ½ 480,000 ½ 1,024,000 ½ Total cash collections ,000 * 440, ,000 1,284,000 *Given. 2. a. Inventory purchases budget: (6) January February March Quarter Budgeted cost of goods sold 1... R240,000 * R360,000 R180,000 R780,000 Add desired ending inventory ,000 * 45,000 30,000 30,000 Total needs ,000 * 405, , ,000 Less beginning inventory. 60,000 * 90,000 ½ 45,000 ½ 60,000 Required purchases... R270,000 * R315,000 ½ R165,000 ½ R750,000 1 For January sales: R400,000 60% cost ratio = R240, At January 31: R360,000 25% = R90,000. At March 31: R200,000 April sales 60% cost ratio 25% = R30,000. *Given. b. Schedule of cash disbursements for purchases: (3) January February March Quarter December purchases... R 93,000 * R 93,000 * January purchases ,000 * R135,000 * 270,000 * February purchases ,500 ½ R157,500 ½ 315,000 March purchases... 82,500 82,500 Total cash disbursements for * purchases... R228,000 R292,500 ½ R240,000 ½ R760,500 *Given. (Award marks if incorrect purchases totals from (a) are carried through and apportioned correctly)

5 Page 5 of Cash budget: (13) January February March Quarter Cash balance, beginning... R 48,000 * R 30,000 R 30,800 R 48,000 Receipts: Add cash collections ,000 * 440, ,000 1,284,000 Total cash available ,000 * 470, ,800 1,332,000 Less disbursements: Inventory purchases ,000 * 292,500 ½ 240,000 ½ 760,500 Salaries and Wages... 27,000 * 27,000 ½ 27,000 ½ 81,000 Advertising 70,000 * 70,000 ½ 70,000 ½ 210,000 Shipping 20,000 * 30,000 15,000 65,000 Other expenses 12,000 * 18,000 9,000 39,000 Equipment purchases... * 1,700 ½ 84,500 ½ 86,200 Cash dividends... 45,000 * 45,000 Total disbursements... (402,000) * (439,200) (445,500) ( 1,286,700) Excess (deficiency) of cash... (50,000)* 30, ,300 45,300 Financing: Borrowings... 80,000 80,000 Repayments... (80,000) (80,000) Interest 1... (2,400) (2,400) Total financing... 80,000 (82,400) (2,400) Cash balance, ending... R 30,000 R 30,800 R 42,900 R 42,900 * Given. 1 R80,000 12% 3/12 = R2, Mark awarded if the correct figure from (b) is carried forward. -1 if Depreciation is included

6 Page 6 of 10 QUESTION 3 Suggested solution [25] 1. a) Direct materials... R 3.50 (5) Direct labour Variable manufacturing overhead Fixed manufacturing overhead (R300,000 -;- 30,000 units) Unit product cost R26.50 b) (11) Sales Cost of goods sold Opening Stock 0 Cost of goods manufactured ( units x R26.50) Goods available for sale Closing Stock (53 000) (2 000 units x R26.50) ( ) Gross Profit / Margin Selling and admin costs ( ) Fixed Variable Net Operating Profit - mark is only awarded if Gross Profit/Margin is given c. Variable costing net loss R (10,000). (4) Add: Fixed manufacturing overhead cost deferred in inventory under absorption costing (2,000 units x R10 per unit) 20,000. Absorption costing net operating income R 10, Under absorption costing, the company did earn a profit for the quarter. (5) However, before the question can really be answered, one must first define what is meant by a profit. The central issue here relates to timing of release of fixed manufacturing overhead costs to expense. Advocates of variable costing would argue that all such costs should be expensed immediately, and that no profit is earned unless the revenues of a period are sufficient to cover the fixed manufacturing overhead costs in full. From this point of view, then, no profit was earned during the quarter, since the fixed costs were not fully covered. Advocates of absorption costing would argue, however, that fixed manufacturing overhead costs attach to units of product as they are produced, and that such costs do not become an expense until the units are sold. Therefore, if the selling price of a unit is greater than the unit product cost (including a proportionate amount of fixed

7 Page 7 of 10 manufacturing overhead), then a profit is earned even if some units produced are unsold and carry some fixed manufacturing overhead with them to the following period. A difficulty with this argument is that profits will vary under absorption costing depending on how many units are added to or taken out of inventory. That is, profits will depend not only on sales, but on what happens to inventories. In particular, profits can be consciously manipulated by increasing or decreasing a company s inventories.

8 Page 8 of 10 QUESTION 4 Suggested solution [25] 1. The net cash inflow from sales of the device for each year would be: (15) **Depreciation is not a cash expense and therefore must be eliminated from this computation. The analysis is: (R315,000 R190,000 = R125,000 ) 5 years = R25,000 depreciation ; R135,000 total expense R25,000 depreciation = R110, Sales in units... 6,000 12,000 15,000 18, Sales in R (@ R35 each) ,000 ½ 420,000 ½ 525,000 ½ 630,000 ½ ½ Less variable expenses (@ R15 each)... (90,000) ½ (180,000) ½ (225,000) ½ (270,000) ½ ( ) ½ Contribution margin ,000 ½ 240,000 ½ 300,000 ½ 360,000 ½ ½ Less fixed expenses: Salaries and other** , , , , Advertising , , , , Total fixed expenses ,000 ½ 290,000 ½ 260,000 ½ 230,000 ½ ½ Net cash inflow (outflow)... (R 170,000) (R 50,000) R40,000 R130,000 R Year

9 Page 9 of Investment in equipment ( ) Salvage of equipment Working Capital ( ) Cash flows from operations (170,000) ( 50,000) 40, , Net Cash Flow ( ) ( ) (50 000) Discount Factor Present Value ( ) ½ ( ) ½ (38 450) ½ ½ ½ ½ NPV ( ) Year

10 Page 10 of The net present value of the proposed investment would be: (10) Since the net present value is negative, the company should not accept the device as a new product 1 mark if all correct cash flows are carried down accurately into correct year. -1 if depreciation is shown in the NPV table -1 if negative figures are not shown in brackets and if layout is poor (i.e. time periods are not correctly shown / allocated).

STUDY UNITS COVERED : STUDY UNITS 1-5 (SECTION B) DUE DATE : 3:00 p.m. 20 MARCH 2012

Page 1 of 8 ASSIGNMENT 1 ST SEMESTER: NAGEMENT ACCOUNTING () STUDY UNITS COVERED : STUDY UNITS 1-5 (SECTION B) DUE DATE : 3:00 p.m. 20 RCH 2012 TOTAL RKS : 100 INSTRUCTIONS TO CANDIDATES FOR COMPLETING