MANAGEMENT ACCOUNTING -M1

Examination: Mid Term

SUBMITTED TO: PROF INTAZAR JAVED

SUBMITTED BY: SYED MUHAMMAD ZARGHAM ALI (2183184)
 Question No 1
Requirement No 1
1) Compute the company’s break-even point in both units and sales dollars. Use the
equation method.
Answer
Break even points in Units:

Formula: “Fixed cost ÷ Contribution margin per unit”

Putting values: FC = 240000 ÷ CM per unit = 15

= 16000 units

Break even points in Dollars:

Formula: “Fixed cost ÷ Contribution margin per unit”

1) As we know “Contribution margin = Selling price – Variable price”

2) Contribution to sales ratio = contribution margin / selling price

Contribution margin = $60 – $45 = 15

Contribution to sales ratio = $15 / $60 = 0.25

Break even in Dollars: $240000 / 0.25 = $960000

Requirement No 2
2) Assume that sales increase by $400,000 next year. If cost behavior patterns
remain unchanged, by how much will the company’s net operating income increase? Use the
CM ratio to compute your answer

Answer:
First, we have to find CM ratio
Formula: CM ratio = Contribution margin / Selling price
Putting their values: $15 / #60 = 25%

Increase in sales= $40000 X CM ratio 25% = 100,000

So, Increase in operating income = $100,000
 Question No 2
Answer:

1) Direct materials inventory:

Direct materials inventory $105
Add: Direct materials purchased 365
Subtract: Direct materials used (385)
Direct materials inventory $85

2) Fixed manufacturing overhead costs:

Total manufacturing overhead costs $450
Subtract: Variable manufacturing overhead costs (265)
Fixed manufacturing overhead costs $185

3) Direct manufacturing labor costs:

Total manufacturing costs incurred during Oct $1,610
Subtract: Direct materials used (385)
Total manufacturing overhead costs (450)
Direct Labor $775

4) Work-in-process inventory:
Total manufacturing costs incurred during Oct $1,610
Add: Work-in-process inventory 10/1/2011 230
Subtract: Cost of goods manufactured (1,660)
Work-in-process inventory 10/31/2011 $180

5) Cost of finished goods available for sale:

Cost of goods manufactured $1,660
Add: Finished-goods inventory 10/1/2011 130
Cost of finished goods available for sale $1,790

6) Finished goods inventory:

Cost of goods manufactured 1,660
Add: Finished-goods inventory 10/1/2011 130
Subtract: Cost of goods sold 1,770
Finished goods inventory 10/31/2011 #20