Reference no: EM133069976
Question 1 - Duke Ltd manufactures and sells decorated surfboards. On its 2021 budget, Duke estimates the following:
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Selling price
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$400
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Variable cost per surfboard
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$200
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Annual fixed costs
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$100,000
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Net profit after tax
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$240,000
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Income tax rate
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30%
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The June 2021 income statement reported that sales were not meeting expectations. For the first six months of the year, only 350 units had been sold at the established price, with variable costs as planned, and it was clear that the net profit after tax projection for 2022 would not be reached unless some actions were taken.
Required -
1. If no changes are made, compute the number of units to sell to achieve its net profit after tax for the year.
2. The management accountant presented the below mutually exclusive alternatives to the chief executive officer. Determine which alternative Duke should select to achieve its net profit after tax objective:
a. Reduce the selling price by $40. The sales organisation forecasts that at this significantly reduced price, 2 700 units can be sold during the remainder of the year. Total fixed costs and variable costs per unit will stay as budgeted.
b. Lower variable cost per unit by $10 using less-expensive direct materials and slightly modified manufacturing techniques. The selling price will also be reduced by $30, and sales of 2 200 units are expected for the remainder of the year.
c. Reduce fixed costs by $10 000 and lower the selling price by 5%. Variable cost per unit will be unchanged. Sales of 2 000 units are expected for the remainder of the year.
Question 2 - The Gong Ltd manufactures two models of specific product, model A and model B. The company sets the budget for manufacturing overhead costs $551,250 and allocates the costs to both products based on direct labour hours. The company provides the costs of the product as follows:
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Model A
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Model B
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Direct material cost per unit
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$4.50
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$5.00
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Direct labour cost per unit
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$9.00
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$4.50
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Direct labour hours
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14,000
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2,500
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Units produced
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35,000
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10,000
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After attending a seminar on ABC costing, the manager of the Gong Ltd starting to believe that the current system to allocate the overhead cost is inaccurate. The manager considered using the Activity Based Costing approach. After making an analysis, it was found that factory overhead was made up of five separate activities as summarised below:
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Activity Cost pool
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% of total overhead costs
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Activity Cost Driver
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Allocation
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Model A
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Model B
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Production set-ups
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10%
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Number of production runs
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5
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10
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Machining
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30%
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Machine hours
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7,500
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5,000
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Materials purchasing
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24%
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Number of purchase orders
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20
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50
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Inspection
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22%
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Inspection hours
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3,500
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3,850
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Materials handling
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14%
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Number of materials requisitions
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30
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60
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100%
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|
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Required -
(a) Calculate manufacturing costs per unit for each product under a simple method using direct labour hours to base the Overhead rate.
(b) Calculate manufacturing costs per unit for each product under Activity Based Costing.
(c) Which method do you recommend and why?