Section I Cost Volume Profit Analysis Net Income Before Tax In year 2014, Hampshire Company was expected to make and sold 60,000 of umbrellas quoted price $12 50 each The company had fixed manufacturing costs of $126,000 It also had fixed costs for administration of $79,525 It also had fixed costs for administration of $79, 525 Cost record of manufacturing umbrellas in year 2014 to produce 60,000 units Direct Materials $3 00 Direct Labor $1 50 Variable Manufacturing Overhead $0 40 Variable Selling Expenses $1 10 Variable Costs $6 00 c The net income before tax of The Hampshire Company $94,475 00 Units Price Totals Sales 60,000 $12 50 $750,000 Variable Costs 60,000 $6 00 $360,000 Fixed Costs $295,525 $295,525 Net Income $94,475 Contribution Margin Contribution Margin per Unit in Dollars Selling Price Variable Costs $6 5 $12 5 $6 Contribution Margin Ratio Contribution Margin Selling Price 52 $6 5 $12 5 Break Even Points in units Fixed Costs Contribution Margins 45,465 $295,525 $6 5 Break Even Points Sales Break Even Points in units x Selling Price in units $568,317 45,465 x $12 5 In conclusion, the companys break even point in total dollars of sales is $568,317 Therefore, the Hampshire Company is breaking even Margin of Safety a In units Margin of Safety in Units Current Unit Sales Break Even Point in Unit Sales 14,534 62 60,000 45,465 b In sales dollars Margin of Safety in Dollars Current Sales in Dollars Break Even Point Sales in Dollars $181,683 $750,000 $568,317 c As a percentage Margin of Safety as a Percentage Margin of Sales in Units Current Unit Sales 24 14,535 60,000 Degree of Operating Leverage Contribution Margin Sales Variable Costs $390,000 $750,000 $360,000 Degree of Operating Leverage Contribution Margin Operating Income (Net Income) 4 1281 $390,000 $94,475 Before Tax Income Increased by 20 Sales increase Current Sales 20 72,000 60,000 20 Units $ Per Unit Totals Sales 72,000 $12 50 $900,000 Variable Costs 72,000 $6 00 $432,000 Fixed Costs $295,525 Net Income $172,475 Operating Leverage (Sales Variable Costs) Net Income 2 71343673 ($900,000 $432,000) $172,475 Increasing (Increasing Net Income Prior Net Income) Prior Net Income 82 56 ($172,475 $94,475) $94,475 Prior Income $94,475 00 From Part 1 Increase 82 56 Prior Income X XX Above Total $172,475 00 Targeted Income Targeted Income (Fixed Costs Target Income) Contribution Margin Fixed Costs Target Income Divided by Contribution Margin of Units (Rounded) Fixed Costs $295,525 $6 50 45,465 Target Income $150,000 $6 50 23077 Total $445,525 $6 50 68,542 Proof for calculation 0 of Units Above X $ Per Unit Revenue 68542 x 12 50 $856,779 Variable Costs 68542 x 6 5 $411,254 Contribution Margin $445,525 Fixed Costs $295,525 Net Income $150,000 Sales Mix Variable Costs Specialty Direct Materials Direct Labor Variable Manufacturing Overhead Variable Selling Expenses $6 2 $3 $1 5 $0 40 $1 3 Current Specialty Total Expected Sales Units 60,000 5,000 65,000 Revenue Sales X Price $750,000 $55,000 $805,000 Variable Costs X Units $360,000 $31,000 $391,000 Contribution Margin $390,000 $24,000 $414,000 Fixed Costs $295,525 $15,000 $310,525 Operating Income $103,475 Prior Net Income From Requirement 1 $94,475 00 Additional Operating Income (Operating Income Above Less Prior Income) $9,000 00 Decision Yes, the company should continue with the specialty sales as it will lead to increase in income of $9000 CVP Analysis Used For Management a To determine the level of profit for a given level of sales Profit Total Revenue Total Variable Cost Total Fixed Cost $750,000 $360,000 $295,525 $94,475 b To determine the level of sales necessary to achieve a target profit Targeted Income (Fixed Costs Target Income) Contribution Margin ($295,525 150,000) $6 5 68,542 units Section II Inventory Management Requirement 1 Hampshire Company Variable Costing Income Statement Units $ Sales 60,000 $12 50 $750,000 00 Variable Cost of Goods Sold Beginning Inventory 0 $0 Direct Materials 80,000 $3 00 $240,000 00 Direct Labor 80,000 $1 50 $120,000 00 Manufacturing Overhead 80,000 $0 40 $32,000 00 Total Variable Costs $392,000 00 Cost of Good Available for Sale $392,000 00 Deduct Ending Inventory 20,000 $4 90 $98,000 00 Variable Costs of Goods Sold $294,000 00 Variable Selling Costs 60,000 $1 10 $66,000 00 $66,000 00 Contribution Margin $390,000 00 Fixed Costs Fixed Manufacturing Costs $216,000 Fixed Administrative Costs $79,525 Operating Income $94,475 00 Requirement 2 Hampshire Company Absorption Costing Income Statement Units $ Sales 60,000 $12 50 $750,000 00 Variable Cost of Goods Sold Beginning Inventory $0 Direct Materials 80,000 $3 00 $240,000 00 Direct Labor 80,000 $1 50 $120,000 00 Manufacturing Overhead 80,000 $0 40 $32,000 00 Total Variable Costs $392,000 00 Allocated Fixed Manufacturing Costs 80,000 $2 70 $216,000 00 Cost of Good Available for Sale $608,000 00 Deduct Ending Inventory 20,000 $7 60 $152,000 00 Costs of Goods Sold $456,000 00 Gross Margin $294,000 00 Fixed Costs Variable Selling Costs 60,000 $1 10 $66,000 Fixed Administrative Costs $79,525 Operating Income $148,475 00 Section III Benchmarking Requirement 1 Price Variances (Actual Price Standard Price) X Actual Quantity Actual Standard Actual Quantity Variance Favorable or Unfavorable Cloth $1 25 $1 15 128,000 $12,800 Unfav Handle Assembly $0 99 $1 05 80,808 $4,848 Fav Labor Price Variance $7 62 $7 50 15,748 $1,890 Unfav Requirement 2 Efficiency Variances (Actual Quantity of Input Used Standard Quantity of Input Allowed for Actual Output) X Budgeted Price of Input Actual Standard Standard Price Variance Favorable or Unfavorable Cloth 128,000 120,000 $1 15 $9,200 Unfav (1 5 Yards per Unit) Handle Assembly 80,808 80,000 $1 05 $848 Unfav (1 per Unit) Labor 15,748 16,000 $7 50 $1,890 Fav ( 20 per Unit) Section IV Alternative Costing Method Cost Information From Instructions Stick Collapsible Units Sold 60,000 3,000 Selling Price $12 50 $14 00 Direct Material Cost Per Unit $3 00 $3 10 Direct Labor Cost Per Hour $7 50 $8 00 Variable MO $0 40 $0 40 Variable Selling Costs $1 10 $1 10 Labor Hours Per Unit 0 2 0 2 Sales Orders 120 1 Purchase Orders 50 3 Production Runs 45 6 Material Moves 86 10 Machine Setups 130 6 Machine Hours 525 32 Inspections 200 10 Shipments 60 3 Activity Information from Instructions Activity Activity Cost Activity Cost Driver Order Processing $35,000 Number of Sales Orders Purchasing $36,000 Number of Purchase Orders Material Handing $28,000 Material Moves Machine Setup $14,000 Machine Setups Production $99,000 Production Runs Assembly $80,000 Machine Hours Inspecting $11,000 Number of Inspections Shipping $7,500 Number of Shipments Requirement 1 Activity Total Costs Quantity of Cost Allocation Base Overhead Allocation Rate Order Processing $35,000 121 $289 Purchasing $36,000 53 $679 Material Handing $28,000 96 $292 Machine Setup $14,000 136 $103 Production $99,000 51 $1,941 Assembly $80,000 557 $144 Inspecting $11,000 210 $52 Shipping $7,500 63 $119 Requirement 2 Traditional Costing Stick Umbrella Collapsible Umbrella Total Revenues $750,000 $42,000 $792,000 Direct Materials $180,000 $9,300 $189,300 Direct Labor $90,000 $4,800 $94,800 Variable Overhead $24,000 $1,200 $25,200 Variable Selling Costs $66,000 $3,300 $69,300 Allocated Fixed Overhead $295,200 $14,760 $309,960 Total Costs $655,200 $33,360 $688,560 Operating Income $94,800 $8,640 $103,440 Operating Income 13 21 13 Per Unit Operating Income $1 58 $2 88 Requirement 3 Activity Based Costing Stick Umbrella Collapsible Umbrella Total Revenues $750,000 $42,000 $792,000 Direct Materials $180,000 $9,300 $189,300 Direct Labor $90,000 $4,800 $94,800 Variable Overhead $24,000 $1,200 $25,200 Variable Selling Costs $66,000 $3,300 $69,300 Order Processing Costs $34,680 $289 $34,969 Purchasing Costs $33,950 $2,037 $35,987 Material Handing Costs $25,112 $2,920 $28,032 Machine Setup Costs $13,390 $618 $14,008 Production Costs $87,345 $11,646 $98,991 Assembly Costs $75,600 $4,608 $80,208 Inspecting Costs $10,400 $520 $10,920 Shipping Costs $7,140 $357 $7,497 Total Costs $647,617 $41,595 $689,212 Operating Income $102,383 $405 $102,788 Operating Income 14 1 13 Per Unit Operating Income $1 71 $0 14 Requirement 4 Costs per Unit Stick Umbrella Collapsible Umbrella Traditional $10 92 $11 12 ABC $10 79 $13 87 Difference $0 13 $2 75 Requirement 5 ABC is a better method of cost allocation as it helps in proper allocation of the cost as per the use of the fixed overhead cost for a particular product Memo to Management Your memo to management should serve as a summary of your quantitative analysis, reviewing the key points and recommendations that you feel management should be aware of A Describe the overall findings of your analysis, including key elements that management should be aware of B Make a recommendation to management based on your cost accounting analysis that will enhance business planning C Recommend a performance tool to management based on your cost accounting analysis that will improve business operations Section V Memo to Management TO John Doe, Accountant Executive FROM Jane Doe, Accountant Research Assistant DATE November 23, 2015 SUBJECT

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Section I : Cost-Volume-Profit Analysis Net Income Before Tax In year 2014, Hampshire Company was expected to make and sold 60,000 of umbrellas quoted price

Section I : Cost-Volume-Profit Analysis

Net Income Before Tax

In year 2014, Hampshire Company was expected to make and sold 60,000 of umbrellas quoted price $12.50 each. The company had fixed manufacturing costs of $126,000. It also had fixed costs for administration of $79,525. It also had fixed costs for administration of $79, 525.

Cost record of manufacturing umbrellas in year 2014 to produce 60,000 units:

Direct Materials $3.00

Direct Labor $1.50

Variable Manufacturing Overhead $0.40

Variable Selling Expenses $1.10

Variable Costs $6.00

c. The net income before tax of The Hampshire Company = $94,475.00

	Units	Price	Totals
Sales	60,000	$12.50	$750,000
Variable Costs	60,000	$6.00	$360,000
Fixed Costs		$295,525	$295,525
Net Income			$94,475

Contribution Margin

Contribution Margin per Unit in Dollars = Selling Price Variable Costs

$6.5 = $12.5 - $6

Contribution Margin Ratio = Contribution Margin/Selling Price

52% = $6.5 / $12.5

Break-Even Points in units = Fixed Costs / Contribution Margins

45,465 = $295,525 / $6.5

Break-Even Points Sales = Break-Even Points in units x Selling Price in units

$568,317 = 45,465 x $12.5

In conclusion, the companys break-even point in total dollars of sales is $568,317. Therefore, the Hampshire Company is breaking-even.

Margin of Safety

a. In units

Margin of Safety in Units = Current Unit Sales Break-Even Point in Unit Sales

14,534.62 = 60,000 45,465

b. In sales dollars

Margin of Safety in Dollars = Current Sales in Dollars Break-Even Point Sales in Dollars

$181,683 = $750,000 - $568,317

c. As a percentage

Margin of Safety as a Percentage = Margin of Sales in Units / Current Unit Sales

24% = 14,535 / 60,000

Degree of Operating Leverage

Contribution Margin = Sales Variable Costs

$390,000 = $750,000 - $360,000

Degree of Operating Leverage = Contribution Margin / Operating Income (Net Income)

4.1281 = $390,000 / $94,475

Before-Tax Income Increased by 20%

Sales increase = Current Sales + 20%

72,000 = 60,000 + 20%

	Units	$ Per Unit	Totals
Sales	72,000	$12.50	$900,000
Variable Costs	72,000	$6.00	$432,000
Fixed Costs			$295,525
Net Income			$172,475

Operating Leverage = (Sales Variable Costs) / Net Income

2.71343673 = ($900,000 - $432,000) / $172,475

Increasing = (Increasing Net Income Prior Net Income) / Prior Net Income

82.56% = ($172,475 $94,475) / $94,475

Prior Income	$94,475.00	From Part 1
Increase	82.56%	Prior Income X XX% Above
Total	$172,475.00

Targeted Income

Targeted Income = (Fixed Costs + Target Income) / Contribution Margin

Fixed Costs + Target Income		Divided by Contribution Margin	# of Units (Rounded)
Fixed Costs	$295,525	$6.50	45,465
Target Income	$150,000	$6.50	23077
Total	$445,525	$6.50	68,542

Proof for calculation

0	# of Units Above X $ Per Unit
Revenue	68542 x 12.50	$856,779
Variable Costs	68542 x 6.5	$411,254
Contribution Margin		$445,525
Fixed Costs		$295,525
Net Income		$150,000

Sales Mix

Variable Costs Specialty = Direct Materials + Direct Labor + Variable Manufacturing Overhead + Variable Selling Expenses

$6.2 = $3 + $1.5 + $0.40 + $1.3

	Current	Specialty	Total
Expected Sales Units	60,000	5,000	65,000
Revenue = Sales X Price	$750,000	$55,000	$805,000
Variable Costs X Units	$360,000	$31,000	$391,000
Contribution Margin	$390,000	$24,000	$414,000
Fixed Costs	$295,525	$15,000	$310,525
Operating Income			$103,475

Prior Net Income From Requirement 1			$94,475.00

Additional Operating Income	(Operating Income Above Less Prior Income)		$9,000.00

Decision:

Yes, the company should continue with the specialty sales as it will lead to increase in income of $9000

CVP Analysis Used For Management:

a. To determine the level of profit for a given level of sales.

Profit = Total Revenue Total Variable Cost Total Fixed Cost

$750,000 - $360,000 - $295,525 = $94,475

b. To determine the level of sales necessary to achieve a target profit.

Targeted Income = (Fixed Costs + Target Income) / Contribution Margin

($295,525 + 150,000) / $6.5 = 68,542 units

Section II : Inventory Management

Requirement 1
Hampshire Company
Variable Costing Income Statement

	Units	$

Sales	60,000	$12.50		$750,000.00
Variable Cost of Goods Sold:
Beginning Inventory		0	$0
Direct Materials	80,000	$3.00	$240,000.00
Direct Labor	80,000	$1.50	$120,000.00
Manufacturing Overhead	80,000	$0.40	$32,000.00
Total Variable Costs			$392,000.00

Cost of Good Available for Sale			$392,000.00
Deduct Ending Inventory	20,000	$4.90	$98,000.00
Variable Costs of Goods Sold				$294,000.00
Variable Selling Costs	60,000	$1.10	$66,000.00	$66,000.00
Contribution Margin				$390,000.00
Fixed Costs:
Fixed Manufacturing Costs				$216,000
Fixed Administrative Costs				$79,525
Operating Income				$94,475.00

Requirement 2
Hampshire Company
Absorption Costing Income Statement

	Units	$
Sales	60,000	$12.50		$750,000.00
Variable Cost of Goods Sold:
Beginning Inventory			$0
Direct Materials	80,000	$3.00	$240,000.00
Direct Labor	80,000	$1.50	$120,000.00
Manufacturing Overhead	80,000	$0.40	$32,000.00
Total Variable Costs			$392,000.00
Allocated Fixed Manufacturing Costs	80,000	$2.70	$216,000.00
Cost of Good Available for Sale			$608,000.00
Deduct Ending Inventory	20,000	$7.60	$152,000.00
Costs of Goods Sold				$456,000.00

Gross Margin				$294,000.00
Fixed Costs:
Variable Selling Costs	60,000	$1.10		$66,000
Fixed Administrative Costs				$79,525
Operating Income				$148,475.00

Section III : Benchmarking

Requirement 1
Price Variances:

(Actual Price Standard Price) X Actual Quantity

	Actual		Standard		Actual Quantity		Variance		Favorable or Unfavorable
Cloth	$1.25		$1.15		128,000		$12,800		Unfav

Handle Assembly	$0.99		$1.05		80,808		-$4,848		Fav

Labor Price Variance	$7.62		$7.50		15,748		$1,890		Unfav

Requirement 2
Efficiency Variances:

(Actual Quantity of Input Used Standard Quantity of Input Allowed for Actual Output) X Budgeted Price of Input

		Actual		Standard		Standard Price		Variance		Favorable or Unfavorable
Cloth		128,000		120,000		$1.15		$9,200		Unfav
(1.5 Yards per Unit)
Handle Assembly		80,808		80,000		$1.05		$848		Unfav
(1 per Unit)
Labor		15,748		16,000		$7.50		-$1,890		Fav
(.20 per Unit)

Section IV : Alternative Costing Method

Cost Information From Instructions
	Stick	Collapsible
Units Sold	60,000	3,000
Selling Price	$12.50	$14.00
Direct Material Cost Per Unit	$3.00	$3.10
Direct Labor Cost Per Hour	$7.50	$8.00
Variable MO	$0.40	$0.40
Variable Selling Costs	$1.10	$1.10
Labor Hours Per Unit	0.2	0.2
Sales Orders	120	1
Purchase Orders	50	3
Production Runs	45	6
Material Moves	86	10
Machine Setups	130	6
Machine Hours	525	32
Inspections	200	10
Shipments	60	3

Activity Information from Instructions
Activity	Activity Cost	Activity Cost Driver
Order Processing	$35,000	Number of Sales Orders
Purchasing	$36,000	Number of Purchase Orders
Material Handing	$28,000	Material Moves
Machine Setup	$14,000	Machine Setups
Production	$99,000	Production Runs
Assembly	$80,000	Machine Hours
Inspecting	$11,000	Number of Inspections
Shipping	$7,500	Number of Shipments

Requirement 1

Activity

Total Costs

Quantity of Cost Allocation Base

Overhead Allocation Rate

Order Processing

$35,000

121

$289

Purchasing

$36,000

$679

Material Handing

$28,000

$292

Machine Setup

$14,000

136

$103

Production

$99,000

$1,941

Assembly

$80,000

557

$144

Inspecting

$11,000

210

$52

Shipping

$7,500

$119

Requirement 2

Traditional Costing

Stick Umbrella

Collapsible Umbrella

Total

Revenues

$750,000

$42,000

$792,000

Direct Materials

$180,000

$9,300

$189,300

Direct Labor

$90,000

$4,800

$94,800

Variable Overhead

$24,000

$1,200

$25,200

Variable Selling Costs

$66,000

$3,300

$69,300

Allocated Fixed Overhead

$295,200

$14,760

$309,960

Total Costs

$655,200

$33,360

$688,560

Operating Income

$94,800

$8,640

$103,440

Operating Income %

13%

21%

13%

Per Unit Operating Income

$1.58

$2.88

Requirement 3
Activity-Based Costing
	Stick Umbrella	Collapsible Umbrella	Total
Revenues	$750,000	$42,000	$792,000
Direct Materials	$180,000	$9,300	$189,300
Direct Labor	$90,000	$4,800	$94,800
Variable Overhead	$24,000	$1,200	$25,200
Variable Selling Costs	$66,000	$3,300	$69,300
Order Processing Costs	$34,680	$289	$34,969
Purchasing Costs	$33,950	$2,037	$35,987
Material Handing Costs	$25,112	$2,920	$28,032
Machine Setup Costs	$13,390	$618	$14,008
Production Costs	$87,345	$11,646	$98,991
Assembly Costs	$75,600	$4,608	$80,208
Inspecting Costs	$10,400	$520	$10,920
Shipping Costs	$7,140	$357	$7,497
Total Costs	$647,617	$41,595	$689,212
Operating Income	$102,383	$405	$102,788
Operating Income %	14%	1%	13%
Per Unit Operating Income	$1.71	$0.14

Requirement 4
Costs per Unit	Stick Umbrella	Collapsible Umbrella
Traditional	$10.92	$11.12
ABC	$10.79	$13.87
Difference	$0.13	-$2.75

Requirement 5

ABC is a better method of cost allocation as it helps in proper allocation of the cost as per the use of the fixed overhead cost for a particular product

Memo to Management

Your memo to management should serve as a summary of your quantitative analysis, reviewing the key points and recommendations that you feel management should be aware of.

A. Describe the overall findings of your analysis, including key elements that management should be aware of. B. Make a recommendation to management based on your cost accounting analysis that will enhance business planning. C. Recommend a performance tool to management based on your cost accounting analysis that will improve business operations.

Section V : Memo to Management

TO: John Doe, Accountant Executive

FROM: Jane Doe, Accountant Research Assistant

DATE: November 23, 2015

SUBJECT: