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Management Accounting

Management Accounting

Question 8

The breakeven point is the turnover on which a investors does not realize a profit or loss that is to say where the result is zero. Calculating the threshold of profitability of a business is an important step on the decision to market a product or not. Hence, in economics and business , specifically managment accounting , break-even point (BEP) is the point at which cost or expenses and revenues are equal: there is no net gain or loss and the one he should have "equal to (broken even)". This do not provide profit or loss, although the opportunity costs have been paid, and capital received a modified risk and expected return.

Break-even point in units

Product A

Product B

Product C

Product D

Selling Price

10

15

8

25

Variable cost/unit

6

10

6

15

Fixed Cost

450,000

Break-even point

112,500

90,000

225,000

45,000

b)

Idaho Consumables

Profit and Loss Statement

For the Year Ended 2005

Sales

Product A

\$500,000

Product B

\$450,000

Product C

\$800,000

Product D

\$500,000

Total Sales

\$2,250,000

Variable Cost

Product A

\$300,000

Product B

\$300,000

Product C

\$600,000

Product D

\$300,000

Total Variable Cost

\$1,500,000

Contribution Margin

\$750,000

Fixed Cost

\$450,000

Net Income

\$300,000

c)

Management concern about increasing competition for some of its products and increasing its sales of product D relative to product C. The initiative would increase annual fixed costs by \$50,000 and alter the sales mix to 25 per cent, 15 per cent, 40 per cent, and 20 per cent. However, after the analysis, it is not recommended that management should go for this initiative as the company will face loss of-\$45,000. The following is the calculation for this decision.

Product A

Product B

Product C

Product D

Selling Price

10

15

8

25

Variable cost/unit

6

10

6

15

Sales Mix Percentage

25%

15%

40%

20%

Contribution Margin per Unit

4

5

2

10

Product A

Product B

Product C

Product D

Selling Price

10

15

8

25

Variable cost/unit

6

10

6

15

Contribution Margin per Unit

4

5

2

10

× Sales Mix Percentage

0.25

0.15

0.4

0.2

1

0.75

0.8

2

Sum: Weighted Average CM per Unit

5

Total Fixed Cost

450,000

Increase in Fixed Cost

50,000

Total Fixed Cost

500,000

÷ Weighted Average CM per Unit

5

Break-even Point in Units of Sales Mix

100,000

Product A

Product B

Product C

Product D

Sales Mix Percentage

25%

15%

40%

20%

× Total Break-even Units

100000

Product Units at Break-even Point

25000

15000

40000

20000

Product A

Product B

Product C

Product D

Product Units at Break-even Point

25000

15000

40000

20000

Selling Price

10

15

8

25

Product Sales in Dollars

250000

225000

320000

500000

Sum: Break-even Point in Dollars

1295000

Idaho Consumables

Profit and Loss Statement

For the Year Ended 2005

Sales

Product A

\$250,000

Product B

\$225,000

Product C

\$320,000

Product D

\$500,000

Total Sales

\$1,295,000

Variable Cost

Product A

\$150,000

Product B

\$150,000

Product C

\$240,000

Product D

\$300,000

Total Variable Cost

\$840,000

Contribution Margin

\$455,000

Fixed Cost

\$500,000

Net Income

-\$45,000

Question 9)

a)

The company should go for the outsourcing as Ignition compnay has offered them to supply sitched for \$8 per unit while if they manufacturing would cost them as followed:

Total Units

25000

Unit per cost

Direct materials

50,000 2

Direct Labour

75,000 3

40,000 2

60,000 2

Total manufacturing costs

225,000 9

Moreover, it was identified that 10,000 of fixed costs will be eliminated. If they outsourced Switches, they can use the released production capacity to generate additional income of \$28,000 from producing a different product. Furthermore, they can be advantageous of the following things as well.

The company should go for outsourcing as it will

Reduce and control operating costs ,

Release their own resources for other purposes,

Obtaining resources, which the company has no,

Accelerate the emergence of the benefits of restructuring ,

Deal with the function to perform difficult or impossible to control,

Raising capital

Sharing of risk

Inflow of cash

b)

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