Assume that no changes are made to the selling price or costs, calculate the amount of units that Sando must sell: i) To breakeven. ii) To attain the estimated net profit. 2) Determine the alternative that Sando should select to achieve its Net profit goal. 3) By reference to the above data: How can a company effectively use CPV (Cost-Volume-Profit) analysis to make strategic decisions about its product pricing and production levels?
Problem Set 1
Below are estimates related to Sando's 2022 budget, a company that specializes in crafting unique ornaments for the Caribbean:
Selling Price: $2500
Variable Cost per Ornament: $1625
Fixed Annual Cost: $140,000
Net Profit (After Tax): $600,000
Income Tax Rate: 25%
Upon reviewing the income statement mid-year, it was evident that sales did not meet the expected levels.
For the first half of the year up to June 2022, 360 units were sold at the projected selling price with variable costs aligning with the plan. However, achieving the projected 2022 net profit appears unlikely without management intervention. Several mutually exclusive options have been presented for consideration:
a) Option 1: Reduce the selling price by $180. This adjustment would enable the sale of 1700 units for the remainder of the year. Both the budgeted fixed costs and variable costs per unit will remain unchanged.
b) Option 2: Lower the variable cost per unit by $60 by sourcing more cost-effective direct materials. Additionally, decrease the selling price by $240, with an expected sales volume of 1900 units for the remaining year.
c) Option 3: Reduce fixed costs by $30,000 and decrease the selling price by 7%. Variable costs will remain unaffected, and 1800 units are anticipated to be sold for the remainder of the year.
Required:
1) Assume that no changes are made to the selling price or costs, calculate the amount of units that Sando must sell:
i) To breakeven.
ii) To attain the estimated net profit.
2) Determine the alternative that Sando should select to achieve its Net profit goal.
3) By reference to the above data: How can a company effectively use CPV (Cost-Volume-Profit) analysis to make strategic decisions about its product pricing and production levels?
Problem Set 2
Passion Limited operates a paint manufacturing plant, housing two distinct departments: the mixing department and the quality control department. The paint undergoes sequential processing in both of these departments.
The company's process-costing system is structured around two primary cost categories: direct materials and conversion costs. Direct materials are introduced at the initial stages of the process, while conversion costs are gradually incurred throughout the process. After completion of the mixing department's tasks on the paint, the product is promptly forwarded to the quality control department. Passion employs the weighted-average method for
Data for the mixing department for October 2020 are as follows:
| Physical Units | |||
| Gallons of Paint | Direct Materials | Conversion | |
| Costs | |||
| Work in process, October 1x | 8,000 | $1,400,000 | $450,700 |
| Started during October 2020 | 22,000 | ||
| Completed during October 2020 | 25,500 | ||
| Work in process, October 31y | 4,500 | ||
| Total costs added during October 2020 | $4,700,000 | 2,555,500 |
^x Degree of completion: direct materials, 100%; conversion costs, 60%.
^y Degree of completion: direct materials, 100%; conversion costs, 70%.
Required:
- Compute equivalent units in the mixing department, for each cost category?
- Summarize total mixing department costs for October 2020 for each cost category, and calculate the cost per equivalent unit?
- Assign total costs to units completed and transferred out and to units in ending work in process?
- By reference to the above data: How does process costing differ from
job costing , and in what types of industries is process costing typically used?
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explain the concept of equivalent units in cost accounting
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