## (Solved) Question 3 - Cost Behaviour Megan Supplies Ltd is a wholesaler for a large variety of plumbing supplies. The company's accountant, Hannah, has...

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Question 3 â€“ Cost Behaviour
Megan Supplies Ltd is a wholesaler for a large variety of plumbing supplies.
The company's
accountant, Hannah, has recently completed a cost study of the firm's
Shipping Department in which he used the kilograms of supplies loaded or
Washer compiled the following data. Required:
1. Draw a scatter diagram of the cost data for the Shipping Department.
2. Estimate the Shipping Department's cost behaviour using the highâ€“low
method. Use an
equation to express the results of this estimation method.
3. Using the equations estimated in Part 2 predict the Shipping Department's
costs for a
month when loads totalling 4500 kilograms are moved.
4. Prepare least squares regression analysis to estimate the variable and fixed
components
for the Shipping Department costs.
5. Based on your spreadsheet write the least squares regression equation for
the
Department's costs.
6. Using the equation from Part 5, predict the firm's Shipping Department's
costs for a month
when loads totalling 4500 kilograms are moved.
7. Why do these cost predictions estimated using the highâ€“low and regression
methods
Question 4 â€“ Cost-Volume-Profit Analysis
The Kingswood Company produces thin limestone sheets that are used for the
facings on
buildings. As can be seen in the contribution margin statement, last year the
company had a net profit of \$157 500, based on sales of 1800 tonnes. The
manufacturing capacity of the firm's facilities is 3000 tonnes per year. Required:
1. Calculate the company's break-even volume, in tonnes, for the most recent
year. (Ignore
income taxes.)
2. If the sales volume is estimated to be 2100 tonnes in the next year, and if
the prices and
costs stay at the same levels and amounts, what net profit can management
expect next year?
3. The company has an overseas customer who has offered to buy 1500
tonnes at \$450 per
tonne. Assume that all the firm's costs would be at the same levels and rates
as in the year
just ended. What net profit would the firm earn if it took this order and
from local customers so as not to exceed production capacity?
4. Kingswood plans to market its product in a new territory. Management
estimates that an
advertising and promotion program costing \$61 500 per year would be
needed for the next
two or three years. In addition, a \$25 per tonne sales commission to the sales
force in the new
territory, over and above the current commission, would be required. How
many tonnes
would need to be sold in the new territory to maintain the firm's current net
profit? Assume
that sales and costs will continue as in the year just ended in the firm's
established territories.
5. Management is considering replacing its labour-intensive production
process with an
automated production system. This would result in an increase of \$58 500
annually in fixed
manufacturing costs. The variable manufacturing costs would decrease by
\$25 per tonne.
Calculate the new break-even volume in tonnes and in sales dollars.
6. Ignore the facts presented in requirement 5. Assume that management
estimates that the
selling price per tonne will decline by 10 per cent next year. Variable costs will increase by
\$40 per tonne, and fixed costs will not change. What sales volume in dollars
would be
required to earn a net profit of \$94 500?
Question 5 â€“ Activity-Based Costing and Management
Opsonin Inc manufactures three products for the pharmaceuticals industry:
â€¢ product P : annual sales, 8000 units.
â€¢ product Q : annual sales, 15 000 units.
â€¢ product R : annual sales, 4000 units.
The company uses a traditional, volume-based product costing system with
manufacturing
overhead applied on the basis of direct labour dollars. The product costs have
been calculated
Machinery
\$1 225 000
Machine setup
5 250
Inspection
525 000
Material handling
875 000
Engineering
344 750
Total
\$2 975 000
Opsonin Inc's pricing method has been to set a budgeted setting price equal
to 150 per cent of full product cost. However, only the Product Q have been
selling at their budgeted price. The budgeted and actual current prices for all
three products are the following: Opsonin Inc has been forced to lower the price of product P in order to get
orders. In contrast,
Opsonin Inc has raised the price of product R several times, but there has
been no apparent loss of sales. Opsonin Inc has been under increasing
pressure to reduce the price even further on gismos. In contrast, Opsonin Inc's
competitors do not seem to be interested in the market for Product R. Opsonin
Inc apparently has this market to itself.
Required:
1. Is product P the company's least profitable product? Explain your answer.
2. Is product R a profitable product for Opsonin Ltd? Explain your answer.
3. Comment on the reactions of Opsonin Inc's competitors to the firm's pricing
strategy. What
dangers does Opsonin Inc face?
4. Opsonin Inc's financial controller, Obrien Sally, recently attended a
conference at which
activity-based costing systems were discussed. She became convinced that
such a system
would help Opsonin Inc's management to understand its product costs better. She obtained
top management's approval to design an activity-based costing system, and
an ABC project
team was formed. In Stage 1 of the ABC project, each of the overhead items
listed in the
overhead budget was placed into its own activity cost pool. Then an activity
driver was
identified for each activity cost pool. Finally, the ABC project team compiled
data showing
the percentage of each activity driver that was consumed by each of Opsonin
Inc's product
lines. These data are summarised as follows: Show how the financial controller determined the percentages given above for
raw material
costs. (Round to the nearest whole per cent.)
5. Develop product costs for the three products on the basis of a simple
activity-based product costing system. (Round to the nearest cent.)
6. Calculate a budgeted price for each product, using Opsonin Inc's pricing
formula. Compare
the new budgeted prices with the current actual selling prices and previously
reported
product costs.
7. Refer to the new budgeted prices for Opsonin Inc's three products, based
on the new activitybased costing system. Write a memo to the company
managing director commenting on the situation Opsonin Inc has been facing
regarding the market for its products and the actions of its competitors.
Discuss the strategic options available to management. What do you
recommend, and why?
8. Refer to the product costs developed in requirement 5. Prepare a table
showing how Opsonin Inc's traditional, volume-based product costing system
distorts the product costs of product P, Q and R.

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