Contribution Margin Per Unit
Question 1:
A. contribution margin per unit:
The contribution margin per unit is determined as follows:
CM = P – V, where CM is the contribution margin, P is the price and V is the variable cost
Selling price = $9
Direct labour and ingredient costs = $5
Given that
CM = P – V
Then in our case
CM = $9 – $5 = $4
Therefore the contribution margin per unit = $4
Answer: $4
B. contribution margin ratio:
The contribution margin ratio is determined as follows:
Contribution margin ratio = (contribution margin / price) X 100
Therefore in our case
Contribution margin ratio = (4 / 9) X 100 = 44.44%
Therefore the contribution margin is 44.44%
Answer: 44.44%
C. break even point
The break even point is the point where total revenue is equal to total costs
Total cost = fixed cost + variable cost
Fixed cost = 5,000
Variable cost = 5 X 1500 units = 7,500
Total cost = 5,000 + 7,500 = 12,500
Break even point price:
Total cost = total revenue
And total revenue = units X price
Total revenue = 12,500
Price = 12,500/1500 = 8.33
Therefore the break even point is $8.33
Answer: $8.33
D. net profit on current sales:
Total revenue = 1500 X 9 = 13500
Total cost = 12500
Total profit = total revenue – total cost
Total profit = 1,000
Answer: $0
E. monthly profit of $2000
Profit = total revenue – total cost
Profit = (price X units) – (fixed costs + variable costs)
Profit = (9 X units) – (5000 + (5 X units))
2000 = 9u – (5000 + 5u)
2000 = 9u -5000 -5u
7000 = 4u
U = 7000/4
Units = 1750
Answer: 1750 units
Question 2:
Journal entries:
General journal of Don Duo
Date
Particulars
Debit
Credit
Supply expenses
840
Supplies
840
June 30
electricity expense
$ 180
electricity payable
$ 180
June 30
Prepaid insurance
$2880
Insurance expense
$2880
June 30
Unearned service revenue
3,000
Account receivable
3,000
June 30
Salaries expenses
$1800
salaries payable
$1800
June 30
Depreciation expenses
4200
accumulated depreciation – office equipment
4200
June 30
Accrued service revenue
3,600
service revenue
3,600
Trial balance:
Don duo
Adjusted trail balance
June 30 2009
No.
Account title
Debit
Credit
100
Cash at bank
8,000
104
Accounts receivable
4,200
112
Prepaid insurance
2,880
113
Supplies
1,560
115
Accrued Service Revenue
3,600
130
Office equipment
21,000
131
Accum Depn – Office Equip
4200
200
Account payable
5400
213
Unearned service revenue
1800
215
Salaries Payable
1,800
218
Electricity Payable
180
300
Capital
26,100
310
Drawings- Don duo
1,300
400
Service revenue
13080
500
Salaries expense
6600
505
Supplies Expense
840
510
Rental expense
1200
515
Insurance Expense
0
520
Depreciation Expense
4200
530
Electricity Expense
180
600
GST control
3000
55,560
55,560
Income statement:
Income statement
For the month ended 30 June 2009
Revenue
13080
Supplies
2400
Closing stock
1560
Cost of supplies used
840
Gross profit
12240
Other expenses
Insurance Expense
0
Depreciation Expense
4200
Electricity Expense
180
Salaries expense
6600
Rental expense
1200
Total expenses
12180
Net profit
60
Question 3:
The best company to invest in is Microsoft, the following are the reason why this is the best option.
1. The sales turnover ratio indicates the number of times a company sells and replaces its inventory in a given period of time; Microsoft has a ratio value of 11 while goggle ratio value is therefore Microsoft a better option given that it can generate more sales in a given period.
2. The Gross profit percentage for Goggle is 89% while Microsoft has a gross profit percentage of 78%, despite goggle having a higher ratio value it is evident that Microsoft will sell more products and therefore the gross profit level will be higher.
3. The Net profit as a percentage of sales ratios for Goggle is 18% while Microsoft value is 20%, therefore per unit sold Microsoft earns more than goggle.
4. the Times interest earned ratio indicates the ability of a company to meet its debts goggle has a ratio value of 23% while Microsoft has a ratio value of 15%, despite Microsoft having a lower ratio it is still evident that compared to the industry this value is considerably high.
5. the Return on equity ratio indicates equity earnings for a given period, Microsoft has a value 36% while goggle has a value 45%, however given that Microsoft will sell more than goggle and given that its net profit percentage is higher the 36% will yield higher returns than the 45% return for goggle
6. The Return on assets ratio indicates the level of asset usage in generating income, Microsoft has a ratio value of 24% while goggle is 18% therefore Microsoft manages its assets more effectively than goggle.
Question 4:
Thomas Green
Purchases, cost of goods sold and inventory budget
July –Sep 2009
July
August
September
Cost of goods sold
sales
45000
60000
55000
Cost of goods sold
31500
42000
38500
Plus desired ending inventory
Next month 40% cost of goods sold
16800
15400
$14,000
12000
12000
12000
12000
ending inventory
28800
27400
26000
=Total inventory required
60300
69400
64500
Less beginning inventory
24600
28800
27400
=Purchases
35700
40600
37100
Question 5:
a. Triple bottom line:
Social:
Involves practices that are fair and benefit the community labour and stake holders
Economic:
This refers to value created by a firm and it is important in that it enables a firm to realize profits
Environment:
This refers to practices that do not harm the environment.
B. business structure:
Hierarchical structure:
Advantage:
Easy to coordinate activities
Disadvantages:
Communication may take longer
Functional structure:
Advantage:
Encourage specialization
Disadvantage:
Poses coordination problems which may take long
Product structure:
Advantage:
Focuses on market segment and therefore needs of consumers are met
Disadvantage:
Function duplication example several sales departments
C. ethical responsibility of accountant
Competence
Confidentiality
Not to perform acts that discredits the accounting profession
Question 6:
Bank reconciliation 31st August 2009
Amount
Bank balance 31 august 2009
4,766
Add
deposit
500
Less
cherub 1134
550.00
Cherub 1137
160.00
Adjusted bank balance 31 august 2009
4556
Summary of the adjustments to cash at bank 31 august 2009
Cash at bank bal 31 august 2009
4,799
Add
EFT Deposit
300
Less
DD-QBE Ins
480
Bank fees
63
Adjusted cash at bank balance 31 august 2009
4556
Question 7;
Option A: upgrading existing facility
Year
0
1
2
3
4
5
Cash inflows
800,000
900,000
1,000,000
1,100,000
1,200,000
Cash outflows
975,000
350,000
350,000
450,000
450,000
500,000
Net cash flows
-975,000
450,000
550,000
550,000
650,000
700,000
Option B: build new facility
Year
0
1
2
3
4
5
Cash inflows
1,250,000
1,150,000
1,000,000
900,000
800,000
Cash outflows
1,000,000
500,000
450,000
400,000
350,000
300,000
Net cash flows
-1,000,000
750,000
700,000
600,000
550,000
500,000
a. The payback period is the time taken by an investment to fully payback the amount invested, option A payback period is 2 years and option B payback period is two years
b. rate of return for options A & B
Option A accounting rate of return = 49.14%
Option B accounting rate of return = 63.42%
c. NPV:
Option A: $849,421
Option B: $1,044,832
d. best option:
Option B is the best investment option given that the rate of return is higher and that the net present value is greater than the amount being invested.
Reference:
Stickney, C. and Schipper, K. (2006) Financial Accounting: An Introduction to Concepts, Methods and Uses, New Jersey: Prentice hall press.
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