Topics: Income statement, Balance sheet, Generally Accepted Accounting Principles Pages: 11 (2087 words) Published: June 21, 2013




Due date:

Word limit:N/A

Weighting:30% of total marks for the subject

Facilitator:Dr. Yap Kim Len

Question 1 (22 marks)

The condensed income statement for the Terri and Jerri partnership for 2010 is as follows.

TERRIF AND JERRI COMPANYIncome StatementFor the Year Ended December 31, 2010| | | | | |
Sales (200,000 units)| | | | $1,200,000|
Cost of goods sold| | | | 800,000|
Gross profit| | | | 400,000|
Operating expenses| | | | |
Selling| | $280,000| | |
Administrative| | 160,000| | 440,000|
Net loss| | | | ($40,000)|

A cost behavior analysis indicates that 75% of the cost of goods sold are variable, 50% of the selling expenses are variable, and 25% of the administrative expenses are variable.


(Round to nearest unit, dollar, and percentage, where necessary. Use the CVP income statement format in computing profits.)

(a)Compute the break-even point in total sales dollars and in units for 2010. (5 marks)

(b)Terri has proposed a plan to get the partnership “out of the red” and improve its profitability. She feels that the quality of the product could be substantially improved by spending $0.25 more per unit on better raw materials. The selling price per unit could be increased to only $6.25 because of competitive pressures. Terri estimates that sales volume will increase by 30%. What effect would Terri’s plan have on the profits and the break-even point in dollars of the partnership? (Round the contribution margin ratio to two decimal places.)

(6 marks)

(c)Jerri was a marketing major in college. She believes that sales volume can be increased only by intensive advertising and promotional campaigns. She therefore proposed the following plan as an alternative to Terri’s (1) Increase variable selling expenses to $0.79 per unit, (2) lower the selling price per unit by $0.30, and (3) increase fixed selling expenses by $35,000. Jerri quoted an old marketing research report that said that sales volume would increase by 60% if these changes were made. What effect would Jerri’s plan have on the profits and the break-even point in dollars of the partnership?

(6 marks)

(d)Which plan should be accepted? Explain your answer.
(5 marks)

Question 2 (20 marks) (26-2A)

The management of Martinez Manufacturing Company has asked for your assistance in deciding whether to continue manufacturing a part or to buy it from an outside supplier. The part, called Tropica, is a component of Martinez’s finished product.

An analysis of the accounting records and the production data revealed the following information for the year ending December 31, 2010.

1.The Machinery Department produced 36,000 units of Tropica.

2.Each Tropica unit requires 10 minutes to produce. Three people in the Machinery Department work full time (2,000 hours per year) producing Tropica. Each person is paid $11.00 per hour.

3.The cost of materials per Tropica unit is $2.00.

4.Manufacturing overhead costs directly applicable to the production of Tropica are: indirect labor, $5,500; utilities, $1,300; depreciation, $1,600; property taxes and insurance, $1,000. All of the costs will be eliminated if Tropica is purchased.

5.The lowest price for a Tropica from an outside supplier is $3.90 per unit. Freight charges will be $0.30 per unit, and a part-time receiving clerk at $8,500 per year will be required.

6.If Tropica is purchased, the excess space will be used to store Martinez’s finished product. Currently, Martinez rents storage space at approximately $0.60 per unit stored per year. Approximately 6,000 units per year are stored in the rented space.


(a)Prepare an incremental analysis for the make-or-buy decision. Should Martinez make or buy the part?...
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