In 2014 two entrepreneurs opened an orange juice Portokalada LTD factory in Greece. The factory produces natural orange juice in 1 litre plastic bottles. The company was in the financial problems and the entrepreneurs decided to hire another clerk shortly before the end of companys first year of operations. The previous clerk, who had a very limited understanding of accounting, prepared the following income statement, which is unsatisfactory in several respects:

You are asked to help the management prepare a correlated income statement for the first year of operations. Management informs you that 60% of the rent, insurance and utilities applies to factory operations, and the remaining 40% should be classified as period expenses. Also, the correct ending inventories are as follows:

As this was the first year of operations, there were no beginning inventories.

Question 1:

Identify the shortcomings and errors in the income statement. On the basis of the shortcomings you have identified, explain whether you would expect the companys actual net income for the first year of operations to be higher or lower than the amount shown. (2 points)

Prepare schedules to determine:

The cost of direct materials used

Total manufacturing overhead. (1 point)

Prepare a schedule of cost of finished goods manufactured during the year. (Use the amounts computed in part b as the cost of direct materials used and manufacturing overhead). (1 point)

Prepare a corrected income statement for the year. Assume that income tax expense amounts to 30% of income before taxes. (2 points)

PART 2

In January 2015 the company gets an order form a supermarket chain for orange juice in 0.2, 0.33, 0.5 and 1.5 litre packages. The management decides to buy two more production lines (one for bottling and other for labelling). Due to the fact that the output is uncertain and individual, the management decides to use job order costing and applies manufacturing overhead to individual jobs by using predetermined overhead rates. In Department A (bottling), overhead is applied on the basis of machine-hours, and in Department B (labelling), overhead is applied on the basis of direct labor hours. At the beginning of the current year, management made the following budget estimates as a step toward determining the overhead application rates:

Production of 400.000 orange juice 0.33 L bottles (job. no 1) was started in the middle of February and completed two weeks later. The cost records for this job show the following information:

Question 2:

Determine the overhead rate that should be used for each department in applying overhead costs to job nr. 1. (2 points)

What is the total cost of job no. 1, and what is the unit cost of the product manufactured on this production order? (2 points)

Prepare the journal entries required to record the sale (on account) of 1000 of 0.33 L bottles to a small retailer. The total sales price was 19.500. (2 points)

PART 3

Portokalada LTD plans to manufacture and sell 500,000 bottles of juice (1L) per month. The following information is available about the Portokalada LTDs costs and expenses:

	Fixed costs	Variable costs per unit
Product costs:
Direct materials		0.5
Direct labor		0.2
Manufacturing overhead	140,000	0.1
Period costs:
Selling & administrative expenses	110,000
Total:	250,000	0.8

Question 3:

What should be the sales price per unit if it sets the target of earning an operating income of 550,000 by producing and selling 1,000,000 units per month? Show your calculations. (2 points)

At the price computed in 3.1, how many units must the company produce and sell to break even? Show your calculations. Illustrate the break-even point on the cost volume-profit graph. Prepare the graph in MS Excel. Show the entry data for the graph; show the Revenue line, the Total costs line and the Fixed costs line on the graph. (3 points)

The company is planning to increase selling & administrative expenses by 20% in the next month. How much (in units) should the company sell to achieve the target operating income of 550,000 per month? Show your calculations. (2 points)