Question

Edinburg Company Accounting information for planning and decision-making The Directors of Edinburg Company are planning for the next year (2020). They want to develop a strategic plan based on the capacity and opportunities of their business. The accountant provided the following forecast for 2020: Budgeted operating activities Sales - $ 800,000 Cost of sales (manufacturing costs) Materials 300,000 Labour 110,000 Variable overheads 50,000 Fixed overheads 60,000 $ 520,000 Selling LLL L Commission* 80,000 Variable expenses 60,000 Fixed expenses 20,000 $ 160,000 Administrative Variable expenses 30,000 Fixed expenses 30,000 $ 60,000 $ 740,000 Budgeted profit $ 60,000 Budgeted production Capacity 400,000 units 600,000 units Sales commission is equal to 10% of sales $

Answer 1

Answer with working is given below

Q.No.1 Revised Selling price per unit $2.200 Total Units sold 400,000 Sales Less: Variable Cost $880,000 $300,000 $110,000 $50,000 $88,000 $60,000 $30,000 $638,000 Materials Labor Variable manufacturing overhead Selling commission -10% of Sales $ Selling variable expense Administration Variable expense Total Variable Cost Contribution Margin $242,000 Less: Fixed Cost Manufacturing selling Administration Additional Advertising cost Total Fixed Cost $60,000 $20,000 $30,000 $70,000 $180,000 Net profit $62,000 Q.No.2 Revised Selling price per unit Total Units sold $1.800 600,000 $1,080,000 Sales Less: Variable Cost Materials $450,000 $165,000 $75,000 $108,000 $90,000 $45,000 $933,000 Labor Variable manufacturing overhead Selling commission -10% of Sales $ Selling variable expense Administration Variable expense Total Variable Cost Contribution Margin $147,000 Less: Fixed Cost Manufacturing Selling Administration Total Fixed Cost $60,000 $20,000 $30,000 $110,000 Net profit $37,000 Contribution Margin % |(Contribution /Sales) 13.61% Break Even point $808,163 |(Fixed Cost/Contribution Margin %) Q.No.3 Revised Selling price per unit $2.00 500,000 Total Units sold Sales Less: Variable Cost Materials $1,000,000 $375,000 $137,500 $62,500 $100,000 $75,000 $37,500 $787,500 Labor Variable manufacturing overhead Selling commission -10% of Sales $ Selling variable expense Administration Variable expense Total Variable Cost Contribution Margin $212,500 Less: Fixed Cost $60,000 $20,000 $30,000 $40,000 $150,000 Manufacturing Selling Administration Sales Promotion Total Fixed Cost $62,500 Net profit Contribution Margin % (Contribution/Sales) 21.25% Break Even point (Fixed Cost/Contribution Margin %) $705,882 Evaluation of Special Order Q.No.4 Materials Labor Variable overhead $0.863 $0.316 $0.144 Shipping cost per unit Selling variable expense Administration Variable expense Total Variable Cost $0.200 $0.150 $0.075 $1.748 $1.748 Unit Sales price for Break even Relevant cost are Variable Cost and additional shipping cost Fixed cost is irrelevant unless incremental cost is there The relevant cost for the order is $ 1.748. Since there is incremental contribution of $ 0.252 Order can be accepted Other factors to consider Capacity Utilisation Any incremental Fixed Cost Any other relevant cost to service the order Classifying Cost into Variable and Fixed Q.No.5 Classifying Cost into Variable and Fixed helps in doing Contribution analysis Variable Costs are relevant costs and fixed cost are irrelevant unless they are incremental It helps in taking reliable decisions like acceptance of special order If there is incremental contribution order should be accepted This technique can be used in other decisions like Make Vs Buy, Product mix, etc Q.No.6 Behavioural factors The director is trying to challenge each department to put forward their proposal When Different departments put forward their proposal all of them can be evaluated and the best one can be chosen The overall objective is to increase the Sales but the option which gives incremental profit will only be considered Working note Per Unit Units $800,000 400,000 $2.000 Sales Materials Labor Variable manufacturing overhead Selling commission - 10 % of Sales Selling variable expense Administration Variable expense $0.750 $300,000 $110,000 $50,000 $80,000 $60,000 $30,000 $0.275 $0.125 $0.200 $0.150 $0.075 $630,000 $170,000 Total Variable Cost Contribution Margin $1.575 Less: Fixed Cost Manufacturing selling Administration Total Fixed Cost Net Profit $60,000 $20,000 $30,000 $110,000 $60,000