ORTEGA, SHANNEN S.

BSA 2-1

Intermediate: Changes in Sales Mix

Problem 8.21, page 189

XYZ Ltd. produces two products and the following budget applies for 20x2:

Product X Product Y

Selling price 6 12

Variable costs 2 4

Contribution margin 4 8

Fixed cost apportioned 100, 000 200, 000

Units sold 70, 000 30, 000

*You are required to calculate breakeven points for each product and the company as a whole and comment your
findings.

ANSWER:

PRODUCT X

Breakeven point = Fixed costs / Contribution margin per unit

= 100, 000 / 4

= 25, 000 units

Breakeven point = 25, 000 units (Product X)

PRODUCT Y

Breakeven point = Fixed costs / Contribution margin per unit

= 200, 000 / 8

= 25, 000 units

ORTEGA, SHANNEN S. BSA 2-1

Breakeven point = 25, 000 units (Product Y)

WHOLE COMPANY

Breakeven point = Fixed costs / Contribution margin per unit

= 100, 000 + 200, 000 = 300, 000

= 300, 000 / average contribution margin

= 300, 000 / 5.2

= 57, 692.31

Breakeven point = 57, 692 units (WHOLE COMPANY)

Average contribution margin = (70, 000 * 4) + (30, 000 * 8)

70, 000 + 30, 000

= 520, 000 / 100, 000

= 5.2

Findings:

Breakeven points for Product X and Y, when added, are less than the
breakeven point for the company as a whole. This means that sales mix would
result differently from the planned sales mix and this would not lead correct
result for the cost-volume-profit analysis.
ORTEGA, SHANNEN S. BSA 2-1

IM13.5 Intermediate: Present value of purchasing or renting machinery. The Portsmere Hospital operates its own
laundry. Last year the laundry processed 120000 kilograms of washing and this year the total is forecast to grow to
132000 kilograms. This growth in laundry processed is forecast to continue at the same percentage rate for the
next seven years. Because of this, the hospital must immediately replace its existing laundry equipment. Currently,
it is considering two options, the purchase of machine A or the rental of machine B. Information on both options is
given below:

Machine A – purchase Machine B – rent

Annual capacity (kilograms) £180000 Annual capacity (kilograms) £170000

Material cost per kilogram £2.00 Material cost per kilogram £1.80

Labour cost per kilogram £3.00 Labour cost per kilogram £3.40

Fixed costs per annum £20000 Fixed costs per annum £18000

Life of machine 3 years Rental per annum £20000

Capital cost £60000 Rental agreement 3 years

Depreciation per annum £20000 Depreciation per annum nil

Other information:

1 The hospital is able to call on an outside laundry if there is either a breakdown or any other reason why the
washing cannot be undertaken in-house. The charge would be £10 per kilogram of washing.

2 Machine A, if purchased, would have to be paid for immediately. All other cash flows can be assumed to occur at
the end of the year.

3 Machine A will have no residual value at any time.

4 The existing laundry equipment could be sold for £10000 cash.

5 The fixed costs are a direct cost of operating the laundry.

6 The hospital’s discount rate for projects of this nature is 15 per cent. You are an accounting technician employed
by the Portsmere Hospital and you are asked to write a brief report to its chief executive.

Your report should:

(A) evaluate the two options for operating the laundry, using discounted cash flow techniques;

(B) recommend the preferred option and identify one possible non-financial benefit;

(C) justify your treatment of the £10000 cash value of the existing equipment;
ORTEGA, SHANNEN S. BSA 2-1

(D) explain what is meant by discounted cashflow.

Note: Inflation can be ignored. AAT Technicians Stage

ANSWER:

(A) evaluate the two options for operating the laundry, using discounted cash flow techniques;

MACHINE A

*solutions are shown below the table 1*

LIFE OF LAUNDR TOTAL DISCOUNT PRESENT CAPITAL TOTAL

MACHINE Y COSTS FACTOR VALUE COST PRESENT
(YEAR) VOLUME VALUE
1 145, 200 746, 000 0.870 649, 020
2 159, 720 818, 600 0.756 618, 862
3 175, 692 898, 460 0.658 591, 187 60, 000 1, 919, 069
Table 1.

LIFE OF MACHINE

 The values are computed for a period of three (3) years because Machine A is said to have a
life span of 3.

VOLUME GROWTH

 The kilograms increase by 10% each year because it was stated that the growth is forecast
to continue at the same percentage rate for seven (7) consecutive years.
- Given from the statement,
Last year = 120, 000kg of laundry
This year = 132, 000kg of laundry

132, 000/120, 000 = 1.1 or 110%

- 110% is multiplied by the volume of laundry from the preceding year to get the
LAUNDRY VOLUME of the present year.
-
ORTEGA, SHANNEN S. BSA 2-1

LIFE OF MACHINE VOLUME GROWTH LAUNDRY

(YEAR) VOLUME (kg)
1 132, 000 * 110% 145, 200
2 145, 200 * 110% 159, 720
3 159, 720 * 110% 175, 692
Table 2. Computation for laundry volume

TOTAL COSTS

YEAR VOLUME MATERIAL LABOR TOTAL FIXED TOTAL

COST COSTS VARIABLE COSTS COSTS
x2 x3 COSTS
1 145, 200kg 290, 400 435, 600 726, 000 20, 000 746, 000
2 159, 720kg 319, 440 479, 160 798, 600 20, 000 818, 600
3 175, 692kg 351, 384 527, 076 878, 460 20, 000 898, 460
Table 3. Computation for total costs

DISCOUNT FACTOR

= 1/(1+r)

*discount rate = 15%

YEAR 1/(1+r) DISCOUNT FACTOR

1 1/(1+.15) 0.8695
2 .8695/(1+.15) 0.7561
3 .7561/(1+.15) 0.6575
Table 4. Computation for discount factor

PRESENT VALUE

YEAR TOTAL COSTS DISCOUNT FACTOR PRESENT VALUE

1 746, 000 0.870 649, 020
2 818, 600 0.756 618, 862
3 898, 460 0.658 591, 187
Table 5. Computation for the present value
ORTEGA, SHANNEN S. BSA 2-1

MACHINE B

*solutions are shown below the table 6*

LIFE OF LAUNDR TOTAL DISCOUNT PRESENT TOTAL

MACHINE Y COSTS FACTOR VALUE PRESENT
(YEAR) VOLUME VALUE
(kg)
1 145, 200 793, 040 0.870 689, 944.8
2 159, 720 868, 544 0.756 656, 619.26
3 170, 000 922, 000 0.658 606, 676
5, 692 56, 920 0.658 37, 453.36 1, 990, 693
Table 6.

LIFE OF MACHINE

 The values are computed for a period of three (3) years because Machine B has a rental
agreement of 3 years.

VOLUME GROWTH

 The kilograms increase by 10% each year because it was stated that the growth is forecast
to continue at the same percentage rate for seven (7) consecutive years.
- Given from the statement,
Last year = 120, 000kg of laundry
This year = 132, 000kg of laundry

132, 000/120, 000 = 1.1 or 110%

- 110% is multiplied by the volume of laundry from the preceding year to get the
LAUNDRY VOLUME of the present year.

LIFE OF MACHINE VOLUME GROWTH LAUNDRY

(YEAR) VOLUME (kg)
1 132, 000 * 110% 145, 200
2 145, 200 * 110% 159, 720
3 159, 720 * 110% 170, 000
5, 692
Table 7. Computation for the laundry volume

Note: It was stated that the Machine B has an annual capacity of only 170 kilograms that’s why for year 3,
the excess of 170, 000kg which is 5, 592kg is prepared for a separate computation.
 ORTEGA, SHANNEN S. BSA 2-1

TOTAL COSTS

YEAR VOLUME MATERIAL LABOR TOTAL FIXED COSTS TOTAL

COST COSTS VARIABLE (18, 000 + 20, 000) COSTS
*1.80 *3.40 COSTS
1 145, 200kg 261, 360 493, 680 755, 040 38, 000 793, 040
2 159, 720kg 287, 496 543, 048 830, 544 38, 000 868, 544
3 170, 000kg 306, 000 578, 000 884, 000 38, 000 922, 000
5, 692kg 56, 920 56, 920
Table 8. Computation for the total costs

Note: For year 3, the 5, 692kg excess from the annual machine capacity is multiplied by 10 which was the
charge given for outside laundry per kilogram of washing.

DISCOUNT FACTOR

= 1/(1+r)

*discount rate = 15%

YEAR 1/(1+r) DISCOUNT FACTOR

1 1/(1+.15) 0.8695
2 .8695/(1+.15) 0.7561
3 .7561/(1+.15) 0.6575
Table 9. Computation for discount factor

PRESENT VALUE

YEAR TOTAL COSTS DISCOUNT FACTOR PRESENT VALUE TOTAL PRESENT VALUE
1 793, 040 0.870 689, 944.8
2 868, 544 0.756 656, 619.26
3 922, 000 0.658 606, 676
56, 920 0.658 37, 453.36 1, 990, 693
Table 10. Computation for the present value

(B) recommend the preferred option and identify one possible non-financial benefit;
ORTEGA, SHANNEN S. BSA 2-1

- It would be better if the Portsmere Hospital would purchase Machine A because it has
lower present value compared to Machine B. Also, it would be better purchased because aside
from it being cheaper, it also has higher laundry capacity than the option for rental, Machine B.

(C) justify your treatment of the £10000 cash value of the existing equipment;

- The 10, 000 cash value of the existing equipment, if sold, would not have any effect on
Portsmere Hospital’s decision whether to purchase either Machine A or Machine B.

(D) explain what is meant by discounted cashflow.

- Discounted cash flow (DCF) is a technique used to compare returns on investments

that takes account of the time value of money.

- It is a valuation method used to estimate the value of an investment based on its

future cash flows. It also figures out the value of an investment today based on projections of
how much money it will generate in the future.

OPTIONAL QUESTION:

In a manufacturing/service industries, what do you think are the roles of an accountant in implementing strategical
techniques in managing or controlling cost? 

In for-profit organizations, there is this main goal that the organizers want to achieve: to
earn profit and to make money. It is impossible for various industries, such as the
manufacturing and service, to be able to continue the business operation if it is experiencing
continuous losses. However, such losses may still be recovered when proper cost control is
observed. As such, it is important to consider the role of an accountant- to implement
strategical techniques in managing or controlling cost.

There is a wide range of activities a cost accountant may do. In controlling the cost, it is
important to maintain cost information of what the company is producing. This is to keep
updated with the records of the company’s product cost. Cost accountants also conduct
management controls of operations. They compare standard costs data with its actual cost to
ORTEGA, SHANNEN S. BSA 2-1

be able to get the product variance which helps in the improvement of management control.
Accountants also do work on specialized projects such that they would look over the
profitability of certain products or, say, the manufacturing locations.

These are some of the activities a cost accountant is bound to do and somehow, it
portrays a huge part in running a manufacturing/service industry. Without having someone to
look over and control for the cost a company incurs, the business would long be ceased to
operate.