MME40001 Engineering Management 2 Topic: Income Statement

Tutorial 2: Statement of Financial Performance Break-even Analysis

Cost-volume-profit Analysis Marginal Analysis

Problem 1 SOLUTION:

Income Statement excerpts:

for the year ending for the year ending for the year ending
31 December 2011 31 December 2012 31 December 2013
Depreciation expense $2,000 Depreciation expense $4,500 Depreciation expense $4,500
- Machine 1 $2,000 - Machine 1 $2,000 - Machine 1 $2,000
- Machine 2 $2,500 - Machine 2 $2,500

Loss on sale of machine $ 1,000

Note: On 31 December 2013, the book value of machine one was $4,000 but was sold for $3,000. The
expected annual depreciation was $2,000 but actual depreciation was $3,000 (from $6,000 to $3,000)

Statement of financial position excerpts:

as on 31 December, 2011 as on 31 December, 2012 as on 31 December, 2013
Non-current asset Non-current asset Non-current asset
Machines $8,000 Machines $18,500 Machines $10,000
purchase value $10,000 purchase value $25,000 purchase value $15,000
Depreciation ($2,000) Depreciation ($6,500) Depreciation ($5,000)
(Accumulated) (Accumulated) (Accumulated)

Note: Machine 1 - annual depreciation $2,000 {(10,000 2,000)4}, and

Machine 2 - annual depreciation $2,500 {(15,000 2,500)5}

Problem 2 SOLUTION:

(a) Rent payable expense for period $9,000

(b) Rates and insurance expense for period $6,000
(c) General expenses paid in period $7,000
(d) Interest payable on loan prepaid $500
(e) Salaries paid for period $6,000
(f) Rent receivable received during period $3,000
Problem 3 SOLUTION:

Beginning Ending
Current Assets
Cash 5,300.00 3,700.00
Account receivable 7,900.00 8,700.00
Inventory 6,400.00 7,500.00
Prepayment 800.00 600.00
20,400.00 20,500.00
Non Current Assets
Land 20,000.00 20,000.00
Building 60,000.00 68,000.00
Plant & equipment 18,000.00 16,500.00

Abstracted from Atrill, Mclaney, Harvey, and Jenner, Accounting An Introduction, 4e, 2009. Pearson. 1
 Motor Vehichle 23,000.00 31,000.00
121,000.00 135,500.00
Changes to
TOTAL ASSETS 141,400.00 156,000.00 14,600.00 Assets
Current Liabilities
Trade creditors 9,000.00 6,900.00
Bank overdraft 7,400.00
Accruals 1,300.00 1,500.00
10,300.00 15,800.00
Non Current Liabilities
Bank loan 40,000.00 36,000.00

Changes to
TOTAL LIABILITIES 50,300.00 51,800.00 1,500.00 Liabilities
Owner's Equity
Retained Profit 91,100.00 116,200.00
Owner's
Drawing 0.00 12,000.00 12,000.00 Distribution
91,100.00 104,200.00
TOTAL LIABILITIES +
OWNER'S EQUITY 141,400.00 156,000.00

Profit = (156,000 - 141,400)-(51,800-50,300)+12,000 = $ 25,100

Profit(or loss) = (Aend Abeg) (Lend Lbeg) New Contributions + Owners Distribution (Drawings or Dividends) +/- other
changes in Owners equity

Problem 4 SOLUTION:
Balance Sheet as at 31 December 2010

Current Assets
Cash 49,730
Account receivable 20,600
Inventory 26,000
Prepayment 325
96,655
Non Current Assets
Land
Building
Plant & equipment
Motor Vehichle 25,000
Depreciation - Motor vehicle (7,500)
17,500
114,155

Current Liabilities
Trade creditors 18,000
Bank overdraft
Accrued Expenses 1,550
19,550

Abstracted from Atrill, Mclaney, Harvey, and Jenner, Accounting An Introduction, 4e, 2009. Pearson. 2
 Non Current Liabilities

Owner's Equity
Initial Capital 50,000
Retained Profit 64,605
Drawing (20,000)
94,605
114,155

Income Statement
For year ended 31 December 2010

Sales 233,000
Less Cost of Goods Sold 114,000
Equals Gross Profit 119,000
Less Expenses *
Rental of premises 20,000
Rate of premises 1,275
Depreciation 5,000
Wages 36,070
electricity 1,200
Accrued wages 860
Accrued electricity bill 690
vehicle running expenses 16,200
bad debt
81,295
Net Profit of the year 37,705

Problem 5 SOLUTION:
(a) First in, first out
Purchases Cost of sales
Tonnes Cost/tonne Total Tonnes Cost/tonne Total
$ $ $ $
1 Sept 20 18 360
2 Sept 48 20 960
4 Sept 15 24 360
6 Sept 10 25 250
7 Sept 20 18 360
40 20 800
93 1,930 60 1,160
Opening inventories + purchases 1,930
Cost of sales (1,160)
Closing inventories 770 [(8 x $20) + (15 x $24) + (10 x $25)]
(b) Last in, first out

Purchases Cost of sales

Tonnes Cost/tonne Total Tonnes Cost/tonne Total
$ $ $ $
1 Sept 20 18 360
2 Sept 48 20 960

Abstracted from Atrill, Mclaney, Harvey, and Jenner, Accounting An Introduction, 4e, 2009. Pearson. 3
 4 Sept 15 24 360
6 Sept 10 25 250
7 Sept 10 25 250
15 24 360
35 20 700
93 1,930 60 1,310
Opening inventories +purchases 1,930
Cost of sales (1,310)
Closing inventories 620 [(20 x $18) + (13 x $20)]
(c) Weighted average cost

Purchases Cost of sales

Tonnes Cost/tonne Total Tonnes Cost/tonne Total
$ $ $ $
1 Sept 20 18 360
2 Sept 48 20 960
4 Sept 15 24 360
6 Sept 10 25 250
93 20.75 1,930 (weighted average cost per tonne
= 1,930/93 = $20.75)
7 Sept 60 20.75 1,248
Opening inventories + purchases 1,930
Cost of sales (1,245) (60 x $20.75)
Closing inventories 685 (33 x $20.75)

Problem 6 SOLUTION:
Selected operating data for three businesses are shown below with some numbers missing, fill the blank:
Sales Variable Fixed Net Income Units Contribution
expenses expenses (loss) sold margin
A $120,000 $40,000 $70,000 $10,000 20,000 $4
B $55,000 $30,000 $15,000 $10,000 500 $50
C 100,000 $60,000 $52,000 ($12,000) 2,500 $16

Problem 7 SOLUTION:
The difference between the total unit of sales and the total costs will help in identifying the actual variable
cost per unit since the overhead is also changing (i.e. the overhead is an example of semi-fixed semi-
variable cost).
Total Fixed cost = $500; Variable cost per unit = $12 (1800 / 150); Contribution per unit = $3 ($15 - $12)
Break even volume is 167 (500/3 = 166.67)

Problem 8 SOLUTION:
(a) Total time required on cutting machines = (2,500 x 1.0) + (3,400 x 1.0) + (5,100 x 0.5) = 8,450 hours
Total time available on cutting machines = 5,000 hours
Total time required on assembling machines = (2,500 x 0.5) + (3,400 x 1.0) + (5,100 x 0.5) = 7,200 hours
Total time available on assembling machines = 8,000 hours

Abstracted from Atrill, Mclaney, Harvey, and Jenner, Accounting An Introduction, 4e, 2009. Pearson. 4
Therefore the limiting factor is the availability of Cutting Machines.

(b) Relevant cash flows

Product Alpha Beta Gamma

(per unit) (per unit) (per unit)
$ $ $
Selling price 25 30 18
Direct materials (12) (13) (10)
Variable production costs (7) (4) (3)
Contribution 6 13 5
Time on cutting 1.0 1.0 0.5
machines
Contribution per hour on $6 $13 $10
cutting machine
Order of priority 3 1 2

Therefore, produce 3,400 units of product Beta using 3,400 hours on cutting machines
3,200 units of product Gamma using 1,600 hours on cutting machines
5,000 hours on cutting machines

Problem 9 SOLUTION:

(a) the break-even point if only product A were made would be:
Fixed costs / (sales revenue per unit variable cost per unit)
= $40,000 / ($30 (15+6)) = 4,445 units (per annum)
(b) Product
A B C
(per unit) (per unit) (per unit)
$ $ $
Selling price 30 39 20
Variable materials (15) (18) (10)
Variable production costs (6) (10) (5)
Contributions 9 11 5
Time on machines (hours) 2 3 1
Contributions per hour on machines $4.50 $3.67 $5.00
Order of priority 2nd 3rd 1st
(c)
Produce: Contribution ($)
5,000 product C using 5,000 hours generating 25,000
2,500 product A using 5,000 hours generating 22,500
10,000 hours 47,500
Less Fixed costs 40,000
Profit $7,500

Leaving a demand for 500 units of product A and 2,000 units of product B unsatisfied

Abstracted from Atrill, Mclaney, Harvey, and Jenner, Accounting An Introduction, 4e, 2009. Pearson. 5
Abstracted from Atrill, Mclaney, Harvey, and Jenner, Accounting An Introduction, 4e, 2009. Pearson. 6