QUESTION1) ABSORBTION VS VARIABLE COSTING
Energize Ltd is a manufacturing company which has started producing a specialist device and has the following data for the first month of operation, January 2013:
Unit information: units
Opening inventory 0
Sales 35000
Production 40000
Closing Inventory 5000
Cost information:
Manufacturing costs:
Rands
Direct materials R 30 per unit
Direct labour R 14 per unit
Variable manufacturing overhead expenses R 4 per unit
Fixed manufacturing overhead expenses R1280000
Selling and administrative costs:
Variable selling and administrative expenses R4 per unit
Fixed selling and administrative expenses R1120 000
Each device is sold at R120. Fixed overheads are allocated on the basis of production units.
Management is anxious to see how the new device is performing in terms of profitability.
Required:
1.1 Compute unit product cost for one device (unit) assuming the:
1.1.1 Absorption costing system is used.
1.1.2 Variable costing. system is used.
1.2 Prepare an income statement for Energize Ltd for January 2013 under the variable costing system.
QUESTION2) COST–VOLUME–PROFIT ANALYSIS
Easy-Answer Ltd manufactures and sells telephone answering machine. Company’s income statement for the most recent year is given below:
Total (R) Per unit (R) Percentage
Sales 1200 000 60 100
Less: Variable expenses (900000) 45 ?
Contribution margin 300 000 15 ?
Less: Fixed expenses (240000)
Net income 60 000
Management is anxious to improve company’s profit performance and has asked for several items of information.
Required:
2.1 Compute company’s contribution margin ratio (as a percentage).
2.2 Use breakeven formula to compute the company’s breakeven point in units and in Rands.
2.3 Compute the company’s margin of safety as a percentage.
2.4 Suppose that next year management wants the company to earn a minimum profit of R90000. How many units will have to be sold to meet this target profitfigure?
2.5 Suppose that sales increases by 4000 units next year. If cost relationships remain unchanged and selling price is constant, what will the company’s new net income be? (Draft a short marginal costing statement to support your answer.)