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 R30.00 100% Variable expenses... 409,500 21.00 70 Contribution margin... R175,500 R 9.00 30% 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 = R180 000 R9 per unit = 20 000 units BEP (R) = Fixed expense CM Ratio = R180 000 0.3 = R600 000 in sales OR BEP (R) = 20 000units x R30 per unit = R600 000 (5)
Page 2 of 10 2. Sales (39,000 units @ R27.00 per unit*)... R1,053,000 Variable expenses (39,000 units @ R21.00 per unit)... (819,000) Contribution margin... 234,000 Fixed expenses (R180,000 + R60,000)... (240,000) Net operating loss... R (6,000) *R30.00 (R30.00 0.10) = 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 *R21.00 + R0.75 = R21.75 Alternative solution: Unit sales to attain target profit = Fixed Costs + Target profit CM per unit = R180 000 + R9 750 R8.25 per unit** = 23 000 units **R30.00 R21.75 = R8.25 (5) 4. a) The new CM ratio would be: Per Unit Percent of Sales Sales... R30.00 100% Variable expenses... 18.00 60 Contribution margin... R12.00 40%
Page 3 of 10 The new break-even point would be: BEP in units = Fixed Costs Unit contribution margin = R180 000 + R72 000 R12 per unit = 21 000 units BEP (R) = Fixed expense CM Ratio = R180 000 + R72 000 0.4 = R630 000 in sales OR BEP (R) = 21 000units x R30 per unit = R630 000 (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... 546,000 21.00 468,000 18.00 Contribution margin... 234,000 R 9.00 312,000 R12.00 Fixed expenses... 180,000 *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)
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... 224,000 * 320,000 ½ 480,000 ½ 1,024,000 ½ Total cash collections... 304,000 * 440,000 540,000 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 2... 90,000 * 45,000 30,000 30,000 Total needs... 330,000 * 405,000 210,000 810,000 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 = R240,000. 2 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... 135,000 * R135,000 * 270,000 * February purchases... 157,500 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)
Page 5 of 10 3. 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... 304,000 * 440,000 540,000 1,284,000 Total cash available... 352,000 * 470,000 570,800 1,332,000 Less disbursements: Inventory purchases... 228,000 * 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)* 30,800 125,300 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 = R2,400. - Mark awarded if the correct figure from (b) is carried forward. -1 if Depreciation is included
Page 6 of 10 QUESTION 3 Suggested solution [25] 1. a) Direct materials... R 3.50 (5) Direct labour... 12.00 Variable manufacturing overhead.... 1.00 Fixed manufacturing overhead (R300,000 -;- 30,000 units) 10.00 Unit product cost R26.50 b) (11) Sales Cost of goods sold Opening Stock 0 Cost of goods manufactured 795 000 (30 000 units x R26.50) Goods available for sale 795 000 Closing Stock (53 000) (2 000 units x R26.50) 1 120 000 (742 000) Gross Profit / Margin 378 000 Selling and admin costs (368 000) Fixed 200 000 Variable 168 000 Net Operating Profit - mark is only awarded if Gross Profit/Margin is given. 10 000 2. 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 10,000. 3. 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
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.
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 = R110,000. 1 2 3 4 5 Sales in units... 6,000 12,000 15,000 18,000 19 000 Sales in R (@ R35 each)... 210,000 ½ 420,000 ½ 525,000 ½ 630,000 ½ 665 000 ½ Less variable expenses (@ R15 each)... (90,000) ½ (180,000) ½ (225,000) ½ (270,000) ½ (285 000) ½ Contribution margin... 120,000 ½ 240,000 ½ 300,000 ½ 360,000 ½ 380 000 ½ Less fixed expenses: Salaries and other**... 110,000 110,000 110,000 110,000 110 000 Advertising... 180,000 180,000 150,000 120,000 120 000 Total fixed expenses... 290,000 ½ 290,000 ½ 260,000 ½ 230,000 ½ 230 000 ½ Net cash inflow (outflow)... (R 170,000) (R 50,000) R40,000 R130,000 R 150 000 Year
Page 9 of 10 0 1 2 3 4 5 Investment in equipment ( 315 000) Salvage of equipment 190 000 Working Capital ( 60 000) 60 000 Cash flows from operations (170,000) ( 50,000) 40,000 130,000 150 000 Net Cash Flow (375 000) (170 000) (50 000) 40 000 130 000 400 000 Discount Factor 1 0.877 0.769 0.675 0.592 0.519 Present Value (375 000) ½ (149 090) ½ (38 450) ½ 27 000 ½ 76 960 ½ 207 600 ½ NPV ( 250 980) Year
Page 10 of 10 2. 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).