The following are estimates relating to the 2020 budget of Thermo Blast that produces specialized ornaments for the Caribbean:

Selling Price --------------------------------- $1500 

Variable cost per Ornament-------------- $700

Fixed annual cost--------------------------- $120000

Net Profit (After tax)----------------------- $800000

Income tax rate ----------------------------- 25%

 

The mid-year review of the income statement revealed that sales were not at the expected level. For the six months of the year to June 2020, 320 units were sold at the estimated selling price with variable cost as planned. However, the net profit projection for 2020 would not be achieved unless management decisions are made.

 

The following mutually exclusive alternatives were presented to management:

 

A. The selling price should be reduced by $150. This reduction in selling price will allow 1500 units to be sold for the balance of the year. The budgeted fixed cost and variable cost per unit will remain unchanged.

 

B. The variable cost per unit will be reduced by $50 by sourcing less expensive direct material. Also, the selling price will be reduced by $200 and the expected sales for the balance of the year is 1300 units.

 

C. The fixed cost would be reduced by $20000 and the selling price by 5%. Variable costs will remain unchanged and 1200 units are expected to be sold for the balance of the year.

 

Required: 

Part A

1. Assume that no changes are made to the selling price or costs, calculate the amount of units that Thermo Blast must sell:

    a. To breakeven (3 Marks)

    b. To attain the estimated net profit (7 Marks)

 

2. Determine the alternative that Thermo Blast should select to achieve its Net profit goal. (15 Marks)

 

Part B

3. By reference to the above data, explain:

    a. Variable costs in the context of cost-volume-profit (CPV) analysis? (5 Marks)

    b. Fixed costs in the context of CPV analysis? (5 Marks)

    c. Contribution margin in the context of CPV analysis? (5 Marks)

 

 

 

Problem Set 2

 

Carrie's Limited has two departments, the assembly department and the testing department in its brake-pad manufacturing plant, where each brake pad is conveyed through each department.

 

Carrie's process-costing system consists of two cost categories: Single direct cost (direct materials) and a single indirect-cost category (conversion costs).

 

Direct materials are added at the beginning of the process. Conversion costs are added evenly during the process. When the assembly department finishes work on each brake pad, it is immediately transferred to testing. Carrie's uses the weighted-average method of process costing.

 

Data for the assembly department for October 2019 are as follows:

Physical Units          (Brake Pads)	Direct Materials	Conversion Costs
Work in process, October 1 x                    6,000  Started during October 2019                  21,000 Completed during October 2019           23,500 Work in process, October 31 y                       3,500 Total costs added during October 2019	$ 1,200,000       $ 4,600,000	$ 400,750       $ 2,456,500

x Degree of completion: direct materials, 100%; conversion costs, 60%.

y Degree of completion: direct materials, 100%; conversion costs, 70%.

 

Required

Part A

1. Compute equivalent units in the assembly department, for each cost category? (10 Marks)
2. Summarize total assembly department costs for October 2019 for each cost category, and calculate the cost per equivalent unit? (10 Marks)
3. Assign total costs to units completed and transferred out and to units in ending work in process? (10 Marks)

Part B

 

      4. By reference to the above data:

          A. What are the similarities between job-order and process costing? (5 Marks)

           B. What are the differences between job-order and process costing? (5 Marks)