For 2013 the income statement for Division Z of Metalworks Ltd was as follows:

Division Z

Income statement for year ending 31 December 2013

Sales (4,500 units)$1,012,500

Less:Cost of goods sold720,000(a)

Gross profit$292,500

Less:Administrative expenses$150,000

Selling expenses150,000

300,000

Net profit (loss)(7,500)

(a)During 2013 the number of units sold was equal to the number manufactured (that is, 4,500).The cost per unit comprised:

Direct labour$45

Direct materials55

Manufacturing overhead60

$160

Per unit manufacturing overhead was determined on the following basis:

Total variable overhead$49,500

Total fixed overhead220,500

$270,000

Units produced4,500

Overhead per unit$60

The directors of Metalworks met with Kim Smith, the general manager of Division Z, and explained that the 2013 result was unacceptable and that Kim would be given just one year to 'turn things around'.Unless the division showed a healthy profit for 2014 Kim would be replaced.Kim's response to the directors was: 'Don't worry, I know exactly what needs to be done to turn the division around and show a healthy profit for 2014'.

Kim immediately implemented an increase in planned production for 2014, with the number of units to be manufactured to increase to 7,000 for 2014 (compared to 4,500 in 2013).

At the end of 2014 the following income statement was prepared for the Division:

Division Z

Income statement for year ending 31 December 2014

Sales (4,200 units)$945,000

Less:Cost of goods sold598,500(a)

Gross profit$346,500

Less:Administrative expenses$150,000

Selling expenses150,000

300,000

Net profit (loss)46,500

(a)During 2014, 7,000 units were produced and 4,200 were sold.The cost per unit comprised:

Direct labour$45

Direct materials55

Manufacturing overhead42.50

$142.50

Per unit manufacturing overhead was determined on the following basis:

Total variable overhead$77,000

Total fixed overhead220,500

$297,500

Units produced7,000

Overhead per unit$42.50

At the directors' meeting to discuss the 2014 results, Kim Smith was congratulated for the improved performance of the division.One of the directors commented: 'I am not quite sure how it was done, but I nominate Kim Smith for the "Employee of Year Award" for 2014'.

Requirements

(a)What factor(s) caused reported profit to increase for 2014?

(b)What would the profit be in each of 2013 and 2014 if variable costing was used?

20132014

Sales$_________$_________

Variable costs________________

Contribution$_________$_________

Less:Fixed costs

Overhead$_________$_________

Administrative__________________

Selling__________________

Total FC$_________$_________

Net profit/income$_________$_________

(c)Do you think Kim Smith deserves to win the 'Employee of the Year Award' for 2014?Why?

(d)Do you think it likely that Kim will be able to win the 'Employee of the Year Award' again in 2015?Why?