Calculate the net income using contribution approach

Assignment Help Financial Accounting

Reference no: EM132790573

Question 1 - CVP question - Laila company has provided the following information about the company

Sales $225,000

Sales Discount $20,000

Overhead cost (Fixed) $35,000

Overhead (Variable) $20,000

Sales Return /Allowance $2,500

Selling commission [variable] $39,600

Selling commission [fixed] $15,000

Variable admin expenses $24500

Fixed admin expenses $20,000

Tax 25%

Interest expenses $5,420

Capacity of producing 4,000 units

Units sold 3,500

Units produced 3,500

Hint: all selling and admin costs are operating expenses

REQUIRED -

1. Calculate the net income using contribution approach.

2. Calculate Net income using the absorption method [Financial Accounting method].

3. Find CM per unit and the Contribution Margin Ratio.

4. Determine the breakeven sales in units and dollars.

5. Calculate margin of safety in dollars and in percentage.

6. The sales manager believes that a project of the company could increase sales by 25% but variable cost will also decrease by $5,000 and fixed cost will increase by $ 85,000. Should the company accept the project or reject?

7. Determine the sales revenue necessary to generate before tax profit of $75,000.

8. Determine sales revenue necessary to generate after-tax profit of $75,000 if tax rate is 30%.

9. Calculate degree of leverage [DOL] and if sales increases by 25%, what will be the increase or decrease in net income of this company? What will be the total net income if the project is accepted [use original data in the beginning].

QUESTION 2 - ABC problem - Company LSD LTD has 4 types of overhead . The four categories and expected costs for each category for next year are listed below

Setups $150,000

Inspection $90,000

Maintenance $120,000

Material Handling $82,000

Actual overhead Cost $30,000

Estimates for the proposed job [Job #23] are as follows

Direct Materials $6,000

DL (1000 hours) $10,000

Machine Hours 500

# of material moves 12

# of setups 2

# of inspections 10

The company has been asked to submit a bid for a proposed job. The plant manager thinks getting this job would result in new business in future years . Usually bids are based upon full manufacturing cost plus 30%.

In the past, full manufacturing cost has been calculated by allocating overhead using volume based cost driver [[DLH]. The plant manager has heard of a new way of applying overhead that uses cost pools and cost drivers.

Expected activity for the four activity based cost drivers that would be used are:

Machine Hours 35,000

Material Moves 4,600

Setups 3,500

Quality Inspections 5,000

Required -

1. Calculate the predetermined rates using the activity based costing.

2. Determine the amount of overhead that would be applied to the proposed project if activity based drivers are used.

3. Determine the total cost of the proposed job using ABC.

4. What bid price is the company going to use according to its policy?

5. Has the company over-applied or under-applied? How did you come to this conclusion?

Reference no: EM132790573

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