MANAGEMENT SCIENCEPRACTICE SETTOPIC: BREAKEVEN AND SENSITIVITY ANALYSISPROBLEM 1.ABC Manufacturing is a producer of a local product used in house deaning, called Agent C. The production manager isrequired to present a production report for the month August, however he got no idea on what information he neededfor the report, and what analysis could be made to help the top management on their decision-making.The production manager sought your expertise on the subject matter and gave to you the following information:Sales (in Pesos)4,957,875.0022,500.00Sales VolumeVarlable Costs:Cost of Direct Raw Materials895,000.00530,000.00124,200.00Cost of Direct LaborCost of Packaging MaterialsFixed Costs:Monthly DepreciationMonthly Rent of WarehouseFixed Monthly Allowance for ElectricityOther Fixed Manufacturing Overhead650,000.00100,000.00675,000.00146,700.00Required:BREAKEVEN ANALYSIS1. Compute the selling price per unit of Agent C.2. Compute the variable cost per unit of Agent C.3. Compute the variable cost rate of Agent C.4. Compute the contribution margin per unit of Agent C.5. Compute the current contribution margin rate of Agent C.6. Compute the total fixed costs in producing Agent C.7. How many units must ABC Manufacturing produce to breakeven?8. How many units must ABC Manufacturing produce to achieve a desired profit of P 2,000,000?9. From the current sales volume units, how many more units must ABC Manufacturing produce and sell to reach thedesired profit of P 2,000,000?10. From the current breakeven sales, how many more units must ABC produce and sell to achieve a profit of P 1,900,000?11. How much will ABC ean if it produces and sells 10,000 units of Agent C?SENSITIVITY ANALYSIS12. If the selling price per unit is increased by 20% of its current price while the variable cost per unit is also increasedby 30%, compute the following:a. Compute the new selling price per unit.b. Compute the new variable cost per unit.C. Compute the new contribution margin rate.d. How many units must ABC produce and sell to avoid losing money?e. At what n" unit ABC will start earning profit?f. With this proposed changes, how many units more or units less that ABC must produce to reach breakevencompared to the current breakeven?9. How many units of Agent C must be produced and sold to earn a profit P 2,000,000?h. With these changes, how many units more or units less should ABC produce to earn a profit of P 2,000,000, ascompared to the units determined using the current price and variable costs?13. If the fixed cost is increased by P 500,000 per month and 20% income tax is imposed on the net income, computethe following:a. How many units must ABC produce and sell to breakeven?b. With this proposed changes, how many units more or units less that ABC must produce to reach breakevencompared to the current breakeven?C. How many units must ABC produce and sell to achieve a profit of P 2,000,000?d. Assuming the above changes, what price per unit must be charged if the current breakeven units must bemaintained?e. Using the information in letter (d), what will be effect to the contribution margin rate?

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Answered: TOPIC: BREAKEVEN AND SENSITIVITY…

Principles of Cost Accounting

17th Edition

ISBN:9781305087408

Author:Edward J. Vanderbeck, Maria R. Mitchell

Publisher:Edward J. Vanderbeck, Maria R. Mitchell

Chapter7: The Master Budget And Flexible Budgeting

Section: Chapter Questions

Problem 1MC: Flexible budgeting, performance measurement, and ethics Montevideo Manufacturing, Inc. produces a...

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Ethics in Action In August, Lannister Company introduced a new performance measurement system in manufacturing operations. One of the new performance measures is lead time, which is determined by tagging a random sample of items with a log sheet throughout the month. The log sheets recorded the time that the sample items started production and the time that they ended production, as well as all steps in between. At the end of the month, the controller collected the log sheets and computed the average lead time of the tagged products. This number was reported to central management and was used to evaluate the performance of the plant manager. Because of the poor lead time results reported for August, the plant was under extreme pressure to reduce lead time in September. The following memo was intercepted by the controller. Date: September 3 To: Hourly Employees From: Plant Manager During last month, you may have noticed that some of the products were tagged with a log sheet. This sheet records the time that a product enters production and the time that it leaves production. The difference between these two times is termed the lead time. Our plant is evaluated on improving lead time. From now on, I ask all of you to keep an eye out for the tagged items. When you see a tagged item, it is to receive special attention. Work on that item first, and then immediately move it to the next operation. Under no circumstances should tagged items wait on any other work that you have. Naturally, report accurate information. I insist that you record the correct times on the log sheet as the product goes through your operations. How should the controller respond to this discovery?
Suspicious Acquisition of Data, Ethical Issues Bill Lewis, manager of the Thomas Electronics Division, called a meeting with his controller, Brindon Peterson, and his marketing manager, Patty Fritz. The following is a transcript of the conversation that took place during the meeting: Bill: Brindon, the variable costing system that you developed has proved to be a big plus for our division. Our success in winning bids has increased, and as a result our revenues have increased by 25%. However, if we intend to meet this years profit targets, we are going to need something extraam I right, Patty? Patty: Absolutely. While we have been able to win more bids, we still are losing too many, particularly to our major competitor, Kilborn Electronics. If we knew more about their bidding strategy, we could be more successful at competing with them. Brindon: Would knowing their variable costs help? Patty: Certainly. It would give me their minimum price. With that knowledge, Im sure that we could find a way to beat them on several jobs, particularly on those jobs where we are at least as efficient. It would also help us to identify where we are not cost competitive. With this information, we might be able to find ways to increase our efficiency. Brindon: Well, I have good news. Ive been talking with Carl Penobscot, Kilborns assistant controller. Carl doesnt feel appreciated by Kilborn and wants to make a change. He could easily fit into our team here. Plus, Carl has been preparing for a job switch by quietly copying Kilborns accounting files and records. Hes already given me some data that reveal bids that Kilborn made on several jobs. If we can come to a satisfactory agreement with Carl, hell bring the rest of the information with him. Well easily be able to figure out Kilborns prospective bids and find ways to beat them. Besides, I could use another accountant on my staff. Bill, would you authorize my immediate hiring of Carl with a favorable compensation package? Bill: I know that you need more staff, Brindon, but is this the right thing to do? It sounds like Carl is stealing those files, and surely Kilborn considers this information confidential. I have real ethical and legal concerns about this. Why dont we meet with Laurie, our attorney, and determine any legal problems? Required: 1. Is Carls behavior ethical? What would Kilborn think? 2. Is Bill correct in supposing that there are ethical and/or legal problems involved with the hiring of Carl? (Reread the section on corporate codes of conduct in Chapter 1.) What would you do if you were Bill? Explain.
Communication The controller of New Wave Sounds Inc. prepared the following product profitability report for management, using activity-based costing methods for allocating both the factory overhead and the marketing expenses. As such, the controller has confidence in the accuracy of this report. In addition, the controller interviewed the vice president of marketing, who provided the following insight into the companys three products: The home theater speakers are an older product that is highly recognized in the marketplace. The wireless speakers are a new product that was just recently launched. The wireless headphones are a new technology that has no competition in the marketplace, and it is hoped that they will become an important future addition to the companys product portfolio. Initial indications are that the product is well received by customers. The controller believes that the manufacturing costs for all three products are in line with expectations. Based on the information provided: 1. Calculate the ratio of gross profit to sales and the ratio of operating income to sales for each product. 2. Write a brief (one-page) memo using the product profitability report and the calculations in (a) to make recommendations to management with respect to strategies for the three products.
Product decisions under bottlenecked operations Mill Metals Inc. has three grades of metal product, Type 5, Type 10, and Type 20. Financial data for the three grades are as follows: Mills operations require all three grades to be melted in a furnace before being formed. The furnace runs 24 hours a day, 7 days a week, and is a production bottleneck. The furnace hours required per unit of each product are as follows: The Marketing Department is considering a new marketing and sales campaign. Which product should be emphasized in the marketing and sales campaign in order to maximize profitability?
Pareto chart and cost of quality report for a manufacturing company The president of Mission Inc. has been concerned about the growth in costs over the last several years. The president asked the controller to perform an activity analysis to gain a better insight into these costs. The activity analysis revealed the following: The production process is complicated by quality problems, requiring the production manager to expedite production and dispose of scrap. Instructions 1. Prepare a Pareto chart of the company activities. 2. Classify the activities into prevention, appraisal, internal failure, external failure, and not costs of quality (producing product). Classify the activities into value-added and non-value-added activities. 3. Use the activity cost information to determine the percentages of total costs that are prevention, appraisal, internal failure, external failure, and not costs of quality. 4. Determine the percentages of total costs that are value-added and non-value-added. 5. Interpret the information.
Flexible budgeting, performance measurement, and ethics Montevideo Manufacturing, Inc. produces a single type of small motor. The bookkeeper who does not have an in-depth understanding of accounting principles prepared the following performance report with the help of the production manager. In a conversation with the sales manager, the production manager was overheard saying, You sales guys really messed up our May performance, and it is only because production did such a great job controlling costs that we arent in even worse shape. Required: 1. Do you agree with the production manager that the manufacturing area did a good job of controlling costs? 2. Prepare a flexible budget for Montevideo Manufacturings expenses at the following activity levels: 45,000 units, 50,000 units, and 55,000 units. 3. Prepare a revised performance report, using the most appropriate flexible budget from (2) above. 4. Now what is your response to the production managers claim? 5. Assume that you have just been hired as the new accountant. You observe that the production manager is about to receive a large bonus based on the favorable materials, labor, and factory overhead variances indicated in the flexible budget prepared by the bookkeeper. Using the IMA Statement of Ethical Professional Practice as your guide, what standards, if any, apply to your responsibilities in this matter?
D: Measures of Internal Business Process PerformanceDataSpan, Inc., automated its plant at the start of the current year and installed a flexiblemanufacturing system. The company is also evaluating its suppliers and moving toward LeanProduction. Many adjustment problems have been encountered, including problems relating toperformance measurement. After much study, the company has decided to use the performancemeasures below, and it has gathered data relating to these measures for the first four months ofoperations.Month1 2 3 4Throughput time (days) ? ? ? ?Delivery cycle time (days) ? ? ? ?Manufacturing cycle efficiency (MCE) ? ? ? ?Percentage of on-time deliveries 91% 86% 82% 78%Total sales (units) 3460 3312 3143 3025Management has asked for your help in computing throughput time, delivery cycle time, and MCE.The following average times have been logged over the last four months: Average per Month (in days)1 2 3 4Move time per unit 0.7 0.5 0.6 0.6Process time per unit 2.8 2.7 2.6…
Measures of Internal Business Process Performance DataSpan. Inc., automated its plant at the start of the current year and installed a flexible manufacturing system. The company is also evaluating its suppliers and moving toward Lean Production. Many adjustment problems have been encountered, including problems relating to performance measurement. After much study, the company has decided to use the performance measures below, and it has gathered data relating to these measures for the first four months of operations. Management has asked for your help in computing throughput time, delivery cycle time, and MCE. The following average times have been logged over the last four months: Required: 1. For each month, compute the following: a. The throughput time. b. The delivery cycle time. c. The manufacturing cycle efficiency (MCE). 2. Evaluate the company’s performance over the last four months. 3. Refer to the move lime, process time, and so forth, given above for month 4. a. Assume that…
Tools for Successful ABC/M Implementation The Consortium for Advanced ManagementInternational (CAM-I) and the American Productivity and Quality Center (APQC) collaborated ina survey of 166 manufacturing and service firms to assess the implementation of ABC/M in thesefirms. Sixty-eight percent of the respondents were in manufacturing and 25% in service companies.The results showed that the majority of senior managers reported “very successful” implementationsof the ABC/M system, while department managers were somewhat evenly split between “very successful” and “moderately successful.” Line personnel tended to vote “moderately successful.” So, thehigher the level in the organization, the more perceived benefit of the ABC/M system.Interviews with selected respondents and further data analysis showed that the three mostcommon characteristics of successful systems were (1) a high level of top-management supportand commitment; (2) technical competence of the implementation team; and (3)…
Pareto Chart and Cost of Quality Report for a Manufacturing Company The president of Mission Inc. has been concerned about the growth in costs over the last several years. The president asked the controller to perform an activity analysis to gain a better insight into these costs. The activity analysis revealed the following. The production process is complicated by quality problems, requiring the production manager to expedite production and dispose of scrap. Required: 1. Classify the activities into prevention, appraisal, internal failure, external failure, and not costs of quality (producing product). Classify the activities into value-added and non-value added activities. Activity Activity Cost Cost of Quality Classification VA/NVA Correcting invoice errors $7,500 Disposing of incoming materials with poor quality 15,000 Disposing of scrap 27,500 Expediting late production 22,500 Final inspection 20,000 Inspecting incoming…
Ethics and quality. Weston Corporation manufactures auto parts for two leading Japanese automakers. Nancy Evans is the management accountant for one of Weston’s largest manufacturing plants. The plant’s general manager, Chris Sheldon, has just returned from a meeting at corporate headquarters where quality expectations were outlined for 2017. Chris calls Nancy into his office to relay the corporate quality objective that total quality costs will not exceed 10% of total revenues by plant under any circumstances. Chris asks Nancy to provide him with a list of options for meeting corporate headquarters’ quality objective. The plant’s initial budgeted revenues and quality costs for 2017 are as follows: Revenue 5,100,000 Quality costs: Testing of purchased materials 48,000 Quality control training for production staff 7,500 Warranty repairs 123,000 Quality design engineering 72,000 Customer support 55,500 Materials scrap 18,000 Product inspection 153,000 Engineering redesign of failed parts…
Ethics and quality. Weston Corporation manufactures auto parts for two leading Japanese automakers. Nancy Evans is the management accountant for one of Weston’s largest manufacturing plants. The plant’s general manager, Chris Sheldon, has just returned from a meeting at corporate headquarters where quality expectations were outlined for 2017. Chris calls Nancy into his office to relay the corporate quality objective that total quality costs will not exceed 10% of total revenues by plant under any circumstances. Chris asks Nancy to provide him with a list of options for meeting corporate headquarters’ quality objective. The plant’s initial budgeted revenues and quality costs for 2017 are as follows: Revenue 5,100,000 Quality costs: Testing of purchased materials 48,000 Quality control training for production staff 7,500 Warranty repairs 123,000 Quality design engineering 72,000 Customer support 55,500 Materials scrap 18,000 Product inspection 153,000 Engineering redesign of failed parts…

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