The Council of Community Colleges of Jamaica Page 9

SECTION B

Instructions: Answer any three (3) questions from this section.

Question 1
a. Kingston Baker’s Ltd. most recent monthly contribution format income statement is given below:
Sales ………………. $60,000
Less variable expenses .. 45,000
Contribution margin ….. 15,000
Less fixed expenses ….. 18,000
Net loss ……………. ($ 3,000)
The company sells its only product for $10 per unit. There were no beginning or ending inventories.

Calculate:
i. the company’s contribution margin ratio? (2 marks)
ii. the breakeven points in units and in dollar sales? (4 marks)
iii. the total variable expenses at the break-even point? (4 marks)
iv. If unit sales were increased by 25% and fixed expenses were reduced by $4,000 at the current level of sales, what would be the company’s expected net income?
(Prepare a new income statement.)

b. The following monthly budgeted data is available for the Hardrock plc:
Product A Product B Product C
Sales…………….. $660,000 $380,000 $660,000
Variable expenses….. 396,000 266,000 528,000
Contribution margin… $264,000 $114,000 $132,000
Budgeted net income for the month is $260,000.

Calculate:
i. the break-even sales for the month given the sales mix. (5 marks)
ii. the margin of safety. (4 marks)

Question 2
a. Industries Ltd produces and sells a single product. A standard cost card for the product follows:
Standard Cost Card–per unit of product:
Direct materials, 4 Metres at $4.00 …….. $16.00
Direct labor, 1.5 hours at $10.00 ……… 15.00
Variable overhead, 1.5 hours at $3.00 ….. 4.50
Fixed overhead, 1.5 hours at $7.00 …….. 10.50
Standard cost per unit ……………….. $46.00

The company records showed no beginning or ending inventories for the year The company manufactured and sold 18,000 units of product during the year. A total of 70,200 Metres of material was purchased during the year at cost of $4.20 per Metre. All of this material was used to manufacture the 18,000 units. The company worked 29,250 direct labor-hours during the year at a cost of $9.75 per hour. Overhead cost is applied to product s on the basis of direct labor-hours. The denominator activity level (direct labor-hours) was 22,500 hours. Budgeted fixed overhead costs as shown on the flexible budget were $157,500, while actual fixed overhead costs were $156,000. Actual variable overhead costs were $90,000.
Required:
i. Compute the direct materials price and quantity variances for the year.
ii. Compute the direct labor rate and efficiency variances for the year.
iii. Compute the variable overhead spending and efficiency variances for the year.
iv. Compute the fixed overhead budget and volume variances for the year.

b.
i. Define the term standard and give two principal uses of standard costing.
ii. Distinguish between ideal standards and attainable standards

Question 3
Part P60 is used in one of Wallton Ltd.’s products. The company’s accounting department reports the following costs of producing the 7,000 units of the part needed every year.
Direct Material $7.00
Direct Labour 6.00
Variable overheads 5.60
Supervisor Salary 4.70
Depreciation of special equipment 1.50
Allocated general overheads 5.40
An outside supplier has offered to make the part and sell it to the company for $28.30 each. If this offer is accepted, the supervisor’s salary and all of the variable costs, including direct labour, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier’s offer was accepted, only $9,000 of these allocated general overhead costs would be avoided.

Required
a. Prepare a report that shows the effect on the company’s total net operating income of buying part P60 from the supplier rather than continuing to make it inside the company.
ii. Which alternative should the company choose? (10 marks)

b. The following details are available regarding three products X Y and Z
Product X Y Z
Desired production (units) 1,000 2,000 500
$ $ $
Selling price per unit 35 25 15
Variable cost per unit 15 10 5

A special machine is used to manufacture the three products and there are only 15,000 machine hours available.
Product X uses 20 machine hours per unit.
Product Y uses 5 machine hours per unit.
Product Z uses 2 machine hours per unit.

Required:
i. Calculate the priority ranking of the product
ii. Determine the desired production level and the maximum contribution that can be obtained. (15 marks)

Question 4
The Valder Ltd. commenced operations in December 2015 with a capital of $600,000 which was raised through an issue of 600,000 ordinary shares of $1 each. The proceeds of the share issue were paid into the company bank account. During the course of December a number of transactions took place and these are summarized below.
Cash summary December 2015
$ $
Proceeds from share issue 600,000
Less Leasehold premises (20 years) 300,000
Plant (est. life 10 years) 80,000
Equipment (est. life 10 years) 160,000
Tools 20,000
Raw materials 10,000 570,000
———- ———-
Cash balance available 30,000
======
The following additional information is available.
i. Sales are budgeted as follows: $80,000 in January; $160,000 in February and $240,000 in subsequent months. Fifty per cent of the sales will be cash sales and the other fifty per cent credit sales. The period of credit extended to customers will be one month.

ii. The cost of raw materials will amount to 40% of the sales revenue. Half the materials cost for any one month will be paid in cash; the other half will be paid for during the month of purchase.

iii. The company intends to keep a stock of raw materials of $10,000 throughout the year.

iv. Direct wages will be incurred at the rate of $50,000 per month. No time lag is expected here.

Other expenses- depreciation on premises, plant and equipment will be calculated on a straight- line basis. The tools will be re-valued annually and it is expected that annual losses will amount to 20 per cent. All other expenses will be incurred at the rate of $40,000 per month- payable one month in arears

Required
a. Prepare a cash budget for the first six months of 2016 for Valder Company. (16 marks)

b i. Briefly outline five benefits that can be obtained by preparing a budget (5 marks)
b ii. Outline four disadvantages or limitations that are associated with budgeting. (4 marks)


Question 5
Classic Windows. Ltd is considering to invest in two (2) machines that are mutually exclusive. Both machines are expected to have a useful life of four (4) years. Additional
information follows:
Machine A Machine B
$ $
Initial Investment 200 000 250 000
Cash Flow – Year 1 50 000 150 000
Cash Flow – Year 2 75 000 150 000
Cash Flow – Year 3 75 000 100 000
Cash Flow – Year 4 100 000 40 000
Estimated scrap value at end of Year 4 50 000
The company estimates the cost of capital at 20 % per annum.

Calculate:
a i. The payback period for each machine (4 marks)
a ii The net present value for each machine (12 marks)
a iii The profitability index for both machine (4 marks)

b i. Which machine would you recommend, give reasons for your answer. (2 marks)
b ii Outline three limitations of the payback period. (3 marks)