Question

2019A Company 1. The following information is taken from the records of 2019A Company for July: $7,000 32,000 Direct materials Sales Salaries and wages: 3,750 4,500 1,250 1,500 500 600 80 40 100 Selling and administrative salaries Direct manufacturing labour (hourly) Rent - Manufacturing Property Taxes Plant Rent-Office Advertising Amortization of manufacturing equipment (straight-line) Amortization of office equipment (straight-line) General office expenses Indirect manufacturing labour (hourly) Miscellaneous plant overhead Lease cost for salespersons' company vehicles Inventories: Direct materials Work in Process Finished goods 45 28 $4,000 $1,500 450-0 18,000 480 00 24,000 2. The company produces two products; Anise and Basil. The total revenue and total variable cost for each product broke down as follows: Basil 16,000 10,000 Product Revenue 14,000 Variable costs6.000 Required: a. Prepare a schedule of cost of goods manufactured. (6.5 marks) b. Prepare an income statement (absorption using gross margin) for the month. (5.5 marks) c. For each of the expenses on your cost of goods manufactured statement, in a column to the right of your statement, indicate if the expense is direct(D) or indirect(I), and fixed(F) orok variable(V). (1/2 mark each to a maximum of 3 marks) eg. Manufacturing Supervisor Salary 60,000 1&F d. If Anise sells for $7/unit and Basil sells for $4/unit, calculate the contribution margin per unit per product. (1.5 marks) e. Calculate the operating income if sales increase by 10%, (1.5 marks) t. Calculate how many units must be sold to break-even. (2.5 marks) come tax rate is 30%, calculate how many units must be sold to achieve net income of $12,000. (2.5 marks) h. Using the July results, calculate the margin of safety in dollars. (1 mark) L Calculate the degree of operating leverage for July. (1 mark)

Answer 1

Ans. a) & c)

Cost of Goods Manufactured
Particulars		Amount ($)	Classification of Cost
Direct material		$9,500	Direct and Variable
Work in progress		-$30	Direct and Variable
Direct Manufacturing Labour		$4,500	Direct and Variable
Rent Manufacturing		$1,250	Indirect and Fixed
Property Tax- Plant		$1,500	Indirect and Fixed
Amortization of Manufacturing Equipment		$80	Indirect and Fixed
Indirect Manufacturing Labor		$60	Indirect and Variable
Miscellaneous Plant overheads		$45	Indirect and Fixed
Cost of Goods Manufactured		$16,905

Working Notes

Direct material
Particulars		Amount ($)
Purchased		7000
Add: Opening Stock		4000
Less: Closing Stock		1500
Direct material used		9500
Work in progress
Particulars		Amount ($)
Opening Stock		450
Less: Closing Stock		480
Work in progress		-30

b)

Income Statement			Amount ($)
Particulars
Revenue			$32,000
Cost of Goods Sold			$10,905
Gross Margin			$21,095
Less
Selling and administration salary			$3,750
Rent Office			$500
Advertising			$600
Amortization of Office Equipment			$40
General Office Expenses			$100
Lease Cost			$28
Income			$16,077
Revenue			$32,000
Cost of Goods Sold			$10,905
Gross Margin			$21,095
Less
Selling and administration salary			$3,750
Rent Office			$500
Advertising			$600
Amortization of Office Equipment			$40
General Office Expenses			$100
Lease Cost			$28
Income			$16,077

Working Note

Cost Of goods sold
Cost of Goods Manufactured			$16,905
Add: Opening Finished Goods			$18,000
Less: Closing Finished Goods			$24,000
			$10,905

d) Contribution Margin Per Unit Per Product

Product	Anise	Basil
Revenue	$ 14,000.00	$ 16,000.00
Sales Price Per Unit	$ 7.00	$ 4.00
Unit Sold	2000	4000
Variable Cost	$ 6,000.00	$ 10,000.00
Variable cost per unit	$ 3.00	$ 2.50
Contribution Margin Per Unit per product
Sales Price Per Unit	$ 7.00	$ 4.00
Variable cost per unit	$ 3.00	$ 2.50
Contribution Margin Per Unit per product	$ 4.00	$ 1.50

e)

Computation of Operating Income If Sales Increased by 10%
Particulars		Amount ($)
Revenue	(32000*110%)	$35,200
Less
Cost Of Goods Sold		$12,311
Gross Margin		$22,889
Selling and administration salary		$3,750
Rent Office		$500
Advertising		$600
Amortization of Office Equipment		$40
General Office Expenses		$100
Lease Cost		$28
Income		$17,871

All variable cost is Multiplied by 10%

Cost of Goods Manufactured
Particulars		Amount ($)	Classification of Cost	If Sales Increased by 10%
Direct material		$9,500	Direct and Variable	$10,450
Work in progress		-$30	Direct and Variable	-$30
Direct Manufacturing Labour		$4,500	Direct and Variable	$4,950
Rent Manufacturing		$1,250	Indirect and Fixed	$1,250
Property Tax- Plant		$1,500	Indirect and Fixed	$1,500
Amortization of Manufacturing Equipment		$80	Indirect and Fixed	$80
Indirect Manufacturing Labor		$60	Indirect and Variable	$66
Miscellaneous Plant overheads		$45	Indirect and Fixed	$45
Cost of Goods Manufactured		$16,905		$18,311

Cost Of goods sold
Cost of Goods Manufactured			$18,311
Add: Opening Finished Goods			$18,000
Less: Closing Finished Goods			$24,000
Cost Of goods sold			$12,311