Accounting-Pham Ngoc Huynh Nhu - OPEN UNIVERSITY MALAYSIA PHAM NGOC HUYNH NHU MBAOUM K13A TABLE OF CONTENTS I TASK 1 2 II TASK 2 7 III TASK 3 11 IV TASK

Accounting-Pham Ngoc Huynh Nhu - OPEN UNIVERSITY MALAYSIA...

This preview shows page 1 - 6 out of 21 pages.

OPEN UNIVERSITY MALAYSIA -------- PHAM NGOC HUYNH NHU MBAOUM K13A
Image of page 1
TABLE OF CONTENTS I. TASK 1 .............................................................................................................. 2 II. TASK 2 .............................................................................................................. 7 III. TASK 3 ............................................................................................................. 11 IV. TASK 4 ............................................................................................................ 16 V. REFERENCES ................................................................................................. 22 PHAM NGOC HUYNH NHU – MBAOUM K13A Page  2
Image of page 2
I. TASK 1: CVP AnalysisSuccess Company’s contribution format income statement for the most recent month isgiven below:Sales (40,000 units) .....................................................$ 800,000Variable expenses ...........................................................560,000Contribution margin .........................................................240,000Fixed expenses ...............................................................192,000Net operating income .....................................................$ 48,000The industry in which Success Company operates is quite sensitive to cyclicalmovements in the economy. Thus, profits vary considerably from year to yearaccording to general economic conditions. The company has a large amount ofunused capacity and is studying ways of improving profits.Required:1. New equipment has come on the market that would allow Frieden Company toautomate a portion of its operations. Variable expenses would be reduced by $6per unit. However, fixed expenses would increase to a total of $432,000 eachmonth. Prepare two contribution format income statements, one showing presentoperations and one showing how operations would appear if the new equipment ispurchased. Show an Amount column, a Per Unit column, and a Percent column oneach statement. Do not show percentages for the fixed expenses.2. Refer to the income statements in (1) above. For both present operations and theproposed new operations, compute ( a) the degree of operating leverage, ( b) thebreak-even point in dollars, and ( c ) the margin of safety in both dollar andpercentage terms.3. Refer again to the data in (1) above. As a manager, what factor would be paramountin your mind in deciding whether to purchase the new equipment? (Assume thatample funds are available to make the purchase.)4. Refer to the original data. Rather than purchase new equipment, the marketingmanager argues that the company’s marketing strategy should be changed.Instead of paying sales commissions, which are included in variable expenses, themarketing manager suggests that salespersons be paid fixed salaries and that thecompany invest heavily in advertising. The marketing manager claims that thisnew approach would increase unit sales by 50% without any change in sellingPHAM NGOC HUYNH NHU – MBAOUM K13A Page  3
Image of page 3
price; the company’s new monthly fixed expenses would be $240,000; and its netoperating income would increase by 25%. Compute the break-even point in dollarsales for the company under the new marketing strategy. Do you agree with themarketing manager’s proposal?[TOTAL: 25 MARKS] Page  4
Image of page 4
Answer: 1. Contribution format income statements: Present operations Total amount Per unit Percent Sales 800,000 20.00 100% Variable expenses 560,000 14.00 70% Contribution margin 240,000 6.00 30% Fixed expenses 192,000 4.80 Net operating income 48,000 1.20 Purchase new equipment: Total amount Per unit Percent Sales 800,000 20.00 100% Variable expenses 320,000 8.00 40% Contribution margin 480,000 12.00 60% Fixed expenses 432,000 10.80 Net operating income 48,000 1.20 2.
Image of page 5
Image of page 6

You've reached the end of your free preview.

Want to read all 21 pages?

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture