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LABMASK Inc. manufactures washable masks which sell for $45 each. At present, the mask is manufactured in a small plant that relies heavily on direct labor workers. Thus, variable expenses are high, totalling $27 per mask, of which 60% is direct labor cost.

Last year, the company sold 30,000 of these masks, with the following results: Sales (30,000 masks) $1,350, Variable expenses 810, Contribution margin 540, Fixed expenses 450, Net operating income $ 90,

Required: (Round your computation to one decimal place, where applicable)

(a) What is the product’s contribution margin (CM) ratio? Use the CM ratio to determine the breakeven point in dollar sales. (2 marks)

(b) What is the contribution margin per unit? Use the CM per unit to determine the breakeven point in masks. (2 marks)

(c) Compute the margin of safety and the degree of operating leverage at last year’s sales level. (2 marks)

(d) Use the degree of operating leverage you calculated in (c) to determine the estimated net operating income that would result from a 5% increase in unit sales? (1 mark)

(e) Due to an increase in labor rates, the company estimates that next years variable expenses will increase by $9 per mask. If this change takes place and the selling price per mask remains constant at $45, what will be next year’s CM ratio and the break-even point in masks? (2 marks)

(f) Refer to the data in (e) above. If the expected change in variable expenses takes place, how many masks will have to be sold next year to earn the same net operating income, $90,000, as last year? (1 mark)

(g) Refer again to the data in (e) above. The CEO feels that the company must raise the selling price of its washable masks. What selling price per mask must the company charge next year to cover the increased labor costs if he wants to maintain the same CM ratio as last year as computed in (a) above. (1 mark)

(h) Refer to the original data last year. The company is discussing the construction of a new automated manufacturing plant. The new plant would slash variable expenses per mask by 40% but it would cause fixed expenses per year to double.

(i) What would be the company's new CM ratio and new break-even point in masks if the
new plant is built? (2 marks)
(ii) How many masks will have to be sold next year to earn the same net operating income,
$90,000, as last year if the new plant is built? (1 mark)

(iii) Assume the new plant is built and that next year the company manufactures and sells 30,000 masks (the same number as sold last year). Prepare a projected contribution format income statement for next year. Show data on a total, per unit and percentage basis. (5 marks)

(iv) If you were a member of top management, would you have been in favour of constructing the new plant? Explain. (6 marks)

[Total for Question 1 : 25 marks]

The following data concern the operations of Siu Lek Yuen Inc.s processing department for April

Physical Percent Complete Units Materials Conversion Cost Work in process, 1 April 10,000 80% 30% Units started into production during April 250, Units completed during April and transferred to the next department 2,440, Work in process, 30 April 70,000 60% 40%

Paul succeeded Peter as the manager of the processing department after the latter retired in end of March 2022. According to the company’s records, the conversion cost in beginning work in process inventory was $27,820 and $81,240 for materials and conversion costs respectively. Additional materials of $3,720,000 and conversion cost of $5,916,000 were incurred in the department during the month.

Required: (Round your computation to two decimal places, where applicable)

(a) Using the weighted average method, for the month of April,

(i) determine the total cost of units transferred out of the department; (3 marks)
(ii) determine the total cost of ending work-in-process inventory; and (2 marks)
(iii) prepare a cost reconciliation  report for each process and in total. (3 marks)

(b) Paul reported to senior management that he had managed the processing department more effectively than Peter, his predecessor. To check whether Pauls statement is correct, senior management told you to check the date. Use the first-in-first-out method to:

(i) determine the total cost of units transferred out of the department; and (4 marks)
(ii) determine the total cost of ending work-in-process inventory. (2 marks)
(iii) justify (or decline) Pauls claim. (8 marks)

(c) Explain the need for equivalent units and why separate equivalent-unit totals are calculated for direct materials and conversion cost. (3 marks)

[Total for Question 2: 25 marks]

Susan Company commenced business with the investment of $1,372,000 in its operating assets on 1 January 2021 to produce a single product a handmade barbecue grill. The company planned to produce and sell 30,000 units with the estimated selling price of $30 per unit during the year and provided the following estimates:

Variable costs per unit
Direct materials $
Direct labor $
Variable manufacturing overhead $
Variable selling and administrative expenses $
Fixed costs per year
Fixed manufacturing overhead $162,
Fixed selling and administrative expenses $80,

The company computes its predetermined fixed manufacturing overhead absorption rate annually based on its direct labor cost. During the year, 28,000 units were made and 24,000 units were sold at the estimated selling price. Actual costs were incurred on the same basis as the estimated cost structure.

Required:

(a) Calculate the amount of underapplied or overapplied fixed manufacturing overhead for the year. (3 marks)

(b) Assume the companys underapplied or overapplied overhead is closed to Cost of Goods Sold. Prepare an income statement for the year ended 31 December 2021 using absorption costing. (6 marks)

(c) Prepare an income statement for the year ended 31 December 2021 using variable costing. (4 marks)

(d) Explain the reason for any difference in the ending inventory balances under the two costing methods and the impact of this difference on reported net operating profits in (b) and (c). (4 marks)

(e) Assume that the company wishes to prepare the financial statements for its shareholders, How much should be reported in the Finished Goods inventory account? Explain. (3 marks)

(f) Assume the company wants to use absorption cost-plus pricing the set the new selling price for the product next year with the same budgeted production and sales volume at 30,000 units, what would be the revised selling price if the companys required rate of return on the initial investment of $1,372,000 is 10%? How might the customers react to the new price? (5 marks)

Total for Question 3 : 25 marks
Established in 2022, Lady N is considered as one of the finest patisseries in Hong Kong. Lady N
prides itself in creating the freshest and finest cakes that are handmade by its dedicated pastry
chefs with the finest ingredients.
The marketing department of Lady N has submitted the following forecasts for the upcoming
months:
May June July August September
Budgeted sales (units) 12,000 24,000 40,000 20,000 60,
Budgeted production (units) 13,000 26,000 50,000 25,000 60,
Additional information is as follows:
  1. Direct materials are mainly premium cake flour, unsalted butter, and fresh eggs. The information for the purchases of these materials is given below. The payment is made in the month following the purchases. June July August September $ $ $ $ Premium cake flour 90,000 150,000 1 75,000 2 60, Unsalted butter 10,000 18,000 15,000 19, Fresh eggs 4,800 10,000 5,500 1,
  2. The average selling price per cake is $78. All sales are on credit. Based on past experience, Lady N projects that 30% of invoices are paid in the month of sale, 50% are paid in the month following the sale, and another 15% are paid two months following the sale. The remaining 5% will be uncollectible.
  3. Each cake needs 0.25 direct labor hour and each direct labor hour costs $40. Labor costs are paid in the month incurred.
  4. Lady N also incurs fixed manufacturing overhead costs of $850,000 per month (including $100,000 for depreciation of the baking equipment). The cost is paid in the month incurred.
  5. Lady N purchased an automatic dough mixer for $300,000 and a baking oven for $500,000 in August and September with cash respectively. The depreciation of this equipment has been included in the fixed manufacturing cost mentioned in (4).
  6. The beginning cash balance for 1 July is $800,000 and Lady N wants to maintain a cash balance not less than this level at the end of each month. Lady N has an agreement with a local bank that allows Lady N to borrow in increments of $10,000 at the beginning of each month, up to a total loan balance of $2,000,000. The simple interest rate on these loans is 12% p.a. The company would like to pay back the borrowings as soon as it can. No partial payback is allowed. Any payment is made at the end of the month.
  7. A tax bill of $700,000 is to be paid in July.

Required:

(a) Prepare a schedule of expected cash collections for July, August, and September. (6 marks)

(b) Prepare a cash budget by month for July, August, and September. (9 marks)

(c) A sales manager may have more motivation to present a low, conservative sales forecast in order to make the sales managers operation appear to be much more effective when the sales staff meets or exceeds the estimates. What possible harms could be caused to a company if a sales manager produces numbers that will not be hard to beat for the sales staff and what can be done about it? (10 marks)

[Total for Question 4: 25 marks]
End of the Paper