Question

            Managerial Accounting                                                                                        

1. 24 Points (4 points each)

1. The following data is for two companies, LeBron and Luke:

	Le Bron	Luke
Selling price	$50/unit	$60/unit
Variable manufacturing costs	$15/unit	$12/unit
Variable selling and admin. costs	$ 5/unit	$ 8/unit
Fixed manufacturing costs	$100,000	$300,000
Fixed selling and admin. costs	$ 30,000	$ 80,000

(a) Ignoring income taxes, how many units must LeBron sell to break-even?

(b) Assuming a tax rate of 25%, do you think the breakeven point for LeBron would increase or decrease relative to your breakeven point answer in (a) above? Why?

I will increase because you will have to generate a higher contribution margin per unit by increasing the number of Units produced

(c) At a production and sales volume of 10,000 units, what is the operating leverage of Luke?

(d) Assuming a tax rate of 25%, how many more units must Luke sell than LeBron for each to achieve after tax net income of $150,000?

(e) What is LeBron’s product cost per unit under a variable costing system? Provide a specific value.

2. When production levels are expected to decrease within a relevant range, what effects would be anticipated with respect to each of the following (increase, decrease, or no change)?

Answer 1

Answer:-

Computation of break even sale of lebron.

Break even means the sales at which there is neither profit nor loss.

Break even point = Fixed cost ÷ contribution margin per unit.

Fixed cost = fixed manufacturing + fixed selling and admin cost = $100,000 + $30,000 = $130,000.

Contribution margin per unit = sales per unit - variable cost per unit = $50 - $5 -$15 = $50-$20 = $30

Contribution margin = $30

Break even point = $130,000 ÷ $30 = $4333.34

(b) Break even point of lebron would increase due to taxes. Break even sales is nothing cost. Increase in cost leads to increase in break even point.

(c). Computing operating leverage of luke.

operating leverage = contribution ÷ net profit margin.

Particulars	Amount ($)
a)Sales per unit	$60
b)Variable cost per unit	($20)
Contribution margin (a-b)	$40
c)Total contribution ($40*10,000)	$400,000
d) Total fixed cost	($380,000)
Net operating income	$20,000

Operating leverage = $40*10,000 ÷ $20,000

= $400,000 ÷ $20,000

= 20

(d) Each to achieve net income of $150,000

Then what are the units that must be sold to achieve above target.

Number of units to be sold = ( Fixed cost + desired margin ) ÷ contribution margin.

Particulars	Lebron	Luke
a)Sales per unit	$50	$60
b)Variable cost per unit	($20)	($20)
c)Contribution margin	$30	$40
d)Fixed cost + desired profit margin	$280,000	$530,000
e)Number of units to be sold (d ÷ c )	9,333*	13,250

*9,333.33

Number of units Luke must sell than lebro is 13250 - 9333 = 3917

(e) Product cost include direct material + direct labour + direct manufacturing overhead.

In the given information of Lebro product cost shall stand at $15 per unit.

(f)

Production level increase then fixed over head per unit shall decrease and net operating income will increase. If production level falls then fixed overhead per unit will increase and net operating income will fall.

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