Question 1.

a)

FORT ROAD FOXTROT

BALANCE SHEET
AS ON DECEMBER 2018.

Cash $16,550
Accounts Receivable $9,600
Inventories $6,500
Current Assets $32,650
Building and Equipment $122,000
Accumulated Depreciation ($34,000)
Net Fixed Assets $88,000
Total Assets $120,650

Accounts Payable $4,800

Notes Payable $600
Current Liabilities $5,400
Long Term Debt $55,000
Common Stock $45,000
Retained Earnings $15,250
Total Liabilities & Owner's Equity $120,650

FORT ROAD FOXTROT

INCOME STATEMENT
FOR THE YEAR ENDED 2018

Net Sales $12,800

Cost of Goods Sold $5,750
Gross Profit $7,050
Operating Expenses ($1,350)
Depreciation Expense ($1,200)
Interest Expense ($900)
Taxes ($1,440)
Net Income $2,160

Question No. 2
a) COST- VOLUME-PROFIT ANALYSIS
1. Calculate contribution margin per unit.

Contribution Margin per unit = Sales Price per unit – Variable Cost per unit
= $ 117 – $78
= $ 39

2. Calculate Contribution Margin Ratio

Contribution Margin Ratio = Total Revenue - Variable Cost x 100
Total Revenue

= $ 117 - $ 78 x 100
$ 117

= 33.3333%

3. BEP in units and Dollars

Break even Point (Units) = Total Fixed Cost .
Sales Price – Variable Cost

=$ 78,000 .
$ 117 - $ 78

= 2000 units

Break even Point (Dollars) = Total Fixed Cost .

Contribution Margin to Sales Ratio

= $78,000 .
0.33333
= $ 234,000

4. Calculate margin of safety if actual sales are 6,000 unit

Margin of safety = Current Sales Level – Breakeven Point x 100
Current Sales Level

= 6000 - 2000 .X 100

6000

= 66.6667%

5. Prepare a Break-even chart using above information.

DATA :
Sales Volume 6000 units
Fixed Cost 78000 $
Variable Cost 78 $
Selling Price 117 $
CM 39
BEP Unit 2000 units
BEP 234000 $

Variable
Units Fixed Cost Cost Total Cost Revenue

1000 78,000 78,000 156,000 117,000

2000 78,000 156,000 234,000 234,000

3000 78,000 234,000 312,000 351,000

4000 78,000 312,000 390,000 468,000

5000 78,000 390,000 468,000 585,000

6000 78,000 468,000 546,000 702,000

7000 78,000 546,000 624,000 819,000

8000 78,000 624,000 702,000 936,000

 Chart Title
1000000

900000

800000

700000

600000

500000

400000

Breakeven
300000 Point

200000

100000

0
1000 2000 3000 4000 5000 6000 7000 8000

Units Fixed Cost Variable Cost Total Cost Revenue

6. Calculate how many units must sold to get a profit of $156,000.

Units sold to attain target profit = Target Profit + Fixed Expense
Unit CM

= $156,000 + $ 78000
$39

= 6000 Units
Question 2 (b)
Make or Buy Decision
Variable costs and fixed costs, in economics, are the two main types of costs that a
company incurs when producing goods and services.
Variable costs are a company's costs that are associated with the number of goods or
services it produces. A company's variable costs increase and decrease with its
production volume. When production volume goes up, the variable costs will increase.
On the other hand, if the volume goes down, so too will the variable costs.
Unlike variable costs, a company's fixed costs do not vary with the volume of production.
Fixed costs remain the same regardless of whether goods or services are produced or not.
Thus, a company cannot avoid fixed costs.
Marginal cost of production refers to the additional cost of producing just one more unit.
Fixed costs do not affect the marginal cost of production since they do not typically vary
with additional units. Variable costs, however, tend to increase with expanded capacity,
adding to marginal cost due to the law of diminishing marginal returns.
While variable costs tend to remain flat, the impact of fixed costs on a company's bottom
line can change based on the number of products it produces. So, when production
increases, the fixed costs drop. The price of a greater amount of goods can be spread over
the same amount of a fixed cost. In this way, a company may achieve economies of scale
by increasing production and lowering costs.
Fixed costs and variable costs affect the marginal cost of production only if variable costs
exist. The marginal cost of production is calculated by dividing the change in the total
cost by a one-unit change in the production output level. The calculation determines the
cost of production for one more unit of the good. It is useful in measuring the point at
which a business can achieve economies of scale.
The key to optimizing manufacturing costs is to find that point or level as quickly as
possible.
A product is currently suffering a loss doesn’t mean that the production should be
discontinued rather the company should try to achieve economies of scales to earn profit.
2. Thunder Company has been producing 15000 units of part 3741 for its products.
The unit cost for the part is as follows:

Solution:

Recommendation:
If buying is made, it will cost more by $22,500, hence manufacturing is recommended.
 Question 3
A)
Current Ratio = Current Assets / Current Liabilities
= 3,500 / 2,000
= 1.75
Interpretation:
Current Ratio greater than 1 means that the company has enough assets to pay down
short term obligations. The current ratio for the J.P. Robard Mfg is greater than the industry
average this means that the company outperforms the industry which is a positive indicator.

Inventory Turnover = COGS / Inventory

= 3,300 / 1,000
= 3.3
Interpretation:
Inventory turnover ratio measures how fast a company sells inventory. A high turnover
ratio implies either high sales. The company has slightly higher turnover ratio as compared to industry
showing considerable demand for its products.

Total Asset Turnover = Sales / Total Assets

= 8,000 / 8,000
=1
Interpretation:
Total asset turnover ratio measures the efficiency with which a company uses its assets
to produce sales. The company’s ratio is in line with the industry showing that the company is utilizing
its assets just as other companies are utilizing.

Operating Profit Margin= Operating Income / Sales

= 1,700 / 8,000
= 0.2125 OR 21.25%
Interpretation:
Operating Profit Margin reflects the percentage of profit a company produces from its
operations prior to subtracting tax and interest. The company has high profit margin ratio as compared
to industry indicating the company as high performer.
 Operating Income Return on Investment = Operating Income / Total Assets
= 1,700 / 8,000
= 0.2125 OR 21.25%
Interpretation:
Return on investment is used to evaluate the efficiency of an investment. The company
has high ratio as compared to industry which shows that the investments made by the company are
profitable.

Debt Ratio = Total Debt / Total Assets

= 4,000 / 8,000
= 0.50 OR 50%
Interpretation:
Debt ratio can be interpreted as the proportion of company’s assets financed by debt.
Ratio less than 100% shows that the company has more assets to pay back its debt. Industry ratio is
more than the company’s ratio which means that the company is on the safer side from distress as
compared to industry average.

Average Collection Period = Accounts Receivable / Daily Credit Sales

= 2,000 / (8,000/365)
= 91 days
Interpretation:
Companies calculate average collection period to make sure that they have enough cash
to meet their financial obligations. The average collection period represents the average number of days
between the credit sales and the day when purchaser pays for the sale. The company uses less number
of days to converts its receivables into cash as compared to the firms operating in the industry which
means that the company’s operations are smooth.

Fixed Asset Turnover = Sales / Net Fixed Assets

= 8,000 / 4,500
= 1.77
Interpretation:
The fixed asset turnover measures a company’s ability to generate net sales from its
fixed asset investment. A higher fixed asset turnover ratio indicates that a company has effectively used
investments in fixed assets to generate sales. The company has higher fixed asset turnover ratio as
compared to industry which means that the company has more efficient investment in fixed assets.
 Return on Equity = Net Income / Common Equity
= 800 / 4,000
= 20%
Interpretation:
Return on equity measures the profitability of a corporation in relation to stockholder’s equity.
This shows that how well a company deploys its shareholder capital. Company’s ratio is more than the
industry which means company is earning more from shareholders’ funds as compared to industry.

B)

Debt Ratio = Total Debt / Total Assets

= 4,000 / 8,000
= 0.50 OR 50%
Interpretation:
Debt ratio can be interpreted as the proportion of company’s assets financed by debt.
Ratio less than 100% shows that the company has more assets to pay back its debt. Company’s debt
ratio is one of the best measures to see if the company is in distress or its safe. By calculation of debt
ratio we find that the company has financed its assets with more equity and less debt. The higher the
ratio the greater the risk. The ratio is at lower side this means that the company is out of distress and
safe to take loan be cause it has the ability to payback loan.
Debt ratio tells about company’s solvency. The lower debt ratio indicates conservative financing with a
good opportunity to take loan without incurring any significant losses. This mea ns that the financial
health of the company is good. But the decision about any company cannot be made in isolation.
Company specific factors should also be taken into account and comparison of the same firms in the
same industry should be made to see if the specific company is underperforming or outperforms the
industry.

The debt ratio gives users a quick measure of the amount of debt that the company has on its balance
sheets compared to its assets. A debt ratio greater than 1 shows that the company has taken more debt
then its assets. Therefore, 0.50 is a good indicator from investment point of view.
QUESTION 4
A)
Data

Selling Productio
Sales Purchase Wages overhead n
s overheads
90,0 30,0 9,0 7,85
July 00 00 00 0 5,580
93,5 23,0 9,4 9,30
August 00 00 00 0 8,820
Septembe 86,0 48,9 9,9 3,61
r 00 00 00 0 9,470
78,0 34,5 7,0 3,51
October 00 60 00 0 6,880
78,5 35,9 18,6 3,40
November 00 80 00 0 7,000
88,6 37,4 8,0 3,25
December 00 00 00 0 7,680

Working Notes
1 Opening Balance = $ 850,000
2 Purchase
Basis = 50% Current Month
50% Next Month
Purchase CF
30,0
July 00
23,0 (26,50
August 00 0)
48,9 (35,95
September 00 0)
34,5 (41,73
October 60 0)
35,9 (35,27
November 80 0)
37,4 (36,69
December 00 0)

3 Sales
Basis
50% Cash
40% Next Month
10% Following Month

Sales CF
90,0
July 00
93,5
August 00
86,0 89,4
September 00 00
78,0 82,7
October 00 50
78,5 79,0
November 00 50
88,6 83,5
December 00 00

4 Wages
Basis = One month in arrear
9,0
July 00
9,4 (9,00
August 00 0)
9,9 (9,40
September 00 0)
7,0 (9,90
October 00 0)
18,6 (7,00
November 00 0)
8,0 (18,60
December 00 0)

5 Other Overhead
Basis = Two month in arrear

Selling Production
Total CF
overheads overheads
7,8 13,4
July 50 5,580 30
9,3 18,1
August 00 8,820 20
3,6 13,0 (13,4
September 10 9,470 80 30)
3,5 10,3 (18,1
October 10 6,880 90 20)
 3,4 10,4 (13,0
November 00 7,000 00 80)
3,2 10,9 (10,3
December 50 7,680 30 90)

ABACUS Inc
Cash Budget
Quarter October to December
In $
October November December

1 Opening Balance 850,000 788,000 723,700

3 Receipt from Sales 82,750 79,050 83,500

Cash Available 932,750 867,050 807,200

Disbursements

2 Payments for Goods (41,730) (35,270) (36,690)

4 Wages Paid (9,900) (7,000) (18,600)

5 Other Overheads (18,120) (13,080) (10,390)

Land Purchased (75,000)

Loan Payment - (8,000) -

Dividend Payment - (80,000) -

(144,750) (143,350) (65,680)

Closing Balance 788,000 723,700 741,520

QUESTION 5
A)
Direct Material Price Variance = Actual Quantity x (Actual Price - Standard Price )
= 13,000 x ( $13.8 - $10.25 )
= 46,150

Direct Material Quantity Variance = Standard Price x (Actual Quantity - Standard Quantity )
= $10.25 x ( 6.85 – 6.20 )
= 6.6625
Total Direct Material Variance = (Standard Price x Standard Quantity) – (Actual Price x Actual Quantity)
= ($10.25 x 6.20 ) – ( $13.8 x 6.85 )
= 63.55 – 94.53
= 30.98 Unfavorable
Direct Labor Rate Variance = Actual hour x ( Actual Rate – Standard Rate )
= 5.30 x (15.2 – 14)
= 6.36
Direct Labor Efficiency Variance = Standard Rate x (Actual Hour – Standard Hour)
= 14 x (5.30 – 5.5 )
= 2.8
Total Labor Cost Variance = (Actual Hours x Actual Rate) – (Standard Hours x Standard Rate)
= ( 5.30 x 15.2 ) – (5.5 * 14)
= 80.56 – 77
= 3.56
b) Standard overhead rate – actual variable overhead rate
= 11.40 – 10.30 = 1.1
Difference per hour = 1.1 * 360
= 396

c)
AH – SH X SR
= (360 – 300) X 11.40
= 684
Favorable