# Managerial MIdterm

Topics: Variable cost, Costs, Fixed cost Pages: 5 (638 words) Published: January 12, 2014
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Mid-term Quiz #2 (15 marks) - ADMS 2510 F – School of Administrative Studies Faculty of Liberal Arts & Professional Studies, York University 90 minutes, 4 to 5:30 pm, October 28, 2012

Note, this is a closed book examination. Use only simple calculators; smart calculators, smart phones and cell phones cannot be used. There are three questions. Good luck. I-way Inc. has just organized a new division to manufacture and sell specially designed kitchen tables, using select hardwoods. The division’s monthly costs are shown in the schedule below (Solution and marking guide, based on Problem 8.12, 6 marks):

Manufacturing costs:
Variable costs per unit:
Direct materials\$170
Variable18 % of sales
Fixed (total) \$110,000
I-way Inc. regards all of its workers as full-time employees and the company has long-standing no-layoff policy. Furthermore, production is highly automated. Accordingly, the company includes its labour costs in its fixed manufacturing overhead. The tables sell for \$410 each. During the first month of operations, the following activity was recorded: Units produced, 3,700; units sold, 3,300.

Required:
a. Compute the unit product costs under (i) absorption costing, and (ii) variable costing. (2 marks)

Absorption

DM 170
VMOH 18
FMOH (400,000/3,700) 108.11
\$296.11
Variable costing, per unit

DM 170
VMOH 18
\$188

b. Prepare an income statement for the month using absorption costing. (2 marks)

Sales (3,300 units × \$410 per unit)

\$1,353,000
Cost of goods sold:

Beginning inventory
\$         0

(3,700 units × \$296.11 per unit)
1,095,607

Goods available for sale
1,095,607

Less ending inventory
(400 units × \$296.11 per unit)
118,444
977,163
Gross margin

375,837
(18% × \$1,353,000 + \$110,000)

353,540
Operating income

\$  22,297
c. Prepare a contribution-format income statement for the month using variable costing. (2 marks) Sales (3,200 units × \$400 per unit)

\$1,353,000
Variable expenses:

Variable cost of goods sold:

Beginning inventory
\$        0

(3,700 units × \$188 per unit)
695,6000

Goods available for sale
695,600

Less ending inventory
(400 units × \$188 per unit)
75,200

Variable cost of goods sold*
620,400

Variable selling and administrative expense (\$1,353,000 × 18%)  243,540
863,940
Contribution margin

489,050
Fixed expenses:

400,000

110,000
510,000
Operating income

\$  (20,950)

2. Yorkco Inc sells chairs to retailers. The chairs are sold for \$85 each. Variable costs are \$55 per chair, and fixed costs total \$425,000 per year. The company is currently selling 34,000 chairs per year. (Based on Problem 7-18, 5 marks)

Required:
a. Calculate the breakeven point in units. (1 mark)

BEP = \$425,000/(\$85-\$55) = 425,000/30 = 14,167 units

b. What is the breakeven point in units if Yorkco wants to earn \$40,000 after income taxes. The income tax rate is 25%. (2 mark)
BEP = (425,000 + (40,000/0.75)/30
= 425,000 + 53,333)/30
= 478,333/30 = 15,944

c. Management is confident that the company can sell 40,000 chairs next year (an increase of 6,000 chairs or 17.65% over current sales). Compute the following: (i) the expected increase in pre-tax operating income for next year; and (ii) the expected operating income for next year (do not prepare an income statement; use the degree of operating leverage to compute your answer). (2 marks)

(i) 6,000 x \$30 = \$180,000 increase in CM and operating...