Question

PART B: PROBLEM QUESTIONS INSTRUCTION: ANSWER uIREKO) QUESTIONS ONLY Question 1 Salihu Products Inc, has designed a self-inflating sleeping bed for use by backpackers and campers. An investment of RM1,350,000 will be necessary to carry inventories and to purchase some new equipment needed in the manufacturing process. The companies required rate of retum is 24% on all investments. The absorption manufacturing oost for the sleeping cost is RM60 per bed. Standard Cost RM Direct Materials Direct labor 10.80 19.20 Manufacturing overhead (1/5 variable) 30,00 The only variable selling and administrative expense will be a sales commission of RM9 per bed Fixed selling and administrative expenses will be (per year): o Salaries.. . RM 82,000 50,000 o Warehouse Rent... Advertising and other 600,000 Because the company manufactures many products, a limited amount of direct labor hours per year can be devoted to production of the new sleeping beds. A total of 16,000 beds will be produced Manufacturing overhead costs are allocated to products on the basis of direct labor-hours : Reguired sume that the company uses the absorption manufacturing cost approach to cost-plus pricing i The company requires a markup of 125% on the sleeping beds to achieve a 24% return on investment (ROD) if it sells all of the beds it can produce. Show the computation of how the markup of 125% is derived Note: The markup must cover the ROl and the selling and administrative expenses a) A 5 marks) Compute the price of a single sleeping bed. iä. (4 marks) ii. Assume that the compary is able to sell all of the beds that it can produce. Prepare a traditional statement of comprehensive income for the first year of activi ty. (6 marks) b) After marketing the sleeping beds for sevenal yeans, the company is experiencing a falloff demand due to an economic recession. A large retail outlet will make a bulk purchase of beds if label is sewn in and if an acceptable price can be worked out What is the minimum acceptable price for this special order? (6 marks) o) What does the price elasticity of demand measure? Define inelastio demand and elastio demand Which product should have a larger markup percentage over variable cost, a product whose demand is elastic or a product whose demand is inelastic? (4 marks) Total- 25 marks)

Answer 1

a. i.

Direct Materials	10.80
Direct Labor	19.20
Manufacturing Overhead	30.00
Total Manufacturing Cost	60.00
Add: Variable Selling Expenses	9.00
Cost per unit	69.00

Total Manufacturing Cost = RM 60 x 16,000 = RM 960,000.

Markup = 960,000 x 125 % = RM 1,200,000.

ROI = RM 1,350,000 x 24 % = RM 324,000.

Variable Selling Expense ( 16,000 @ 9 )	144,000
Salaries	82,000
Warehouse Rent	50,000
Advertising	600,000
ROI	324,000
Total Markup on Cost	RM 1,200,000

Price of a single bed = RM 60 + RM 60 x 125 % = RM 135.

iii.

Sales Revenue ( 16,000 @ 135)		2,160,000
Less: Cost of Goods Sold ( 16,000 @ 60)		960,000
Gross Profit		1,200,000
Less: Selling and Administrative Expenses
Sales Commission Expense	144,000
Advertising and Other Expense	600,000
Warehouse Rent Expense	50,000
Salaries Expense	82,000	876,000
Net Operating Income		324,000