Mgt Accounting [1] 3rd Year by Alaa Salama Part 07 page no.

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Management Accounting principles

FCES – Damanhour 2023-2024 Part
3rd Year - 2nd Term [ 07 ]
by : Alaa Salama

Management Accounting
Business Section Only

L. Quiz & Exercises

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Mgt Accounting [1] 3rd Year by Alaa Salama Part 07 page no. 2 of 11
Quiz [L]

Lee Enterprises operates in the entertainment industry and one of its activities is to promote
concerts at locations throughout the world. The company is examining the viability of a
concert in Singapore. The estimated fixed costs are $60,000. These include the fees paid to
performers. the hire of the venue and advertising costs. Variable costs consist of the cost of
a pre-packed buffet that will be provided by a firm of caterers at a price, which is currently
being negotiated. but it is likely to be in the region of $20 per ticket sold.
proposed price for the sale of a ticket is $40. Tax rate is 20% .
The management of Lee has requested the following information :
1- The contribution margin per unit is ……..

2- The contribution margin percentage ……….%

3- The Number of tickets that must be sold to break-even is ……………

4- The Value of tickets that must be sold to break-even is ……………

5- How many tickets must be sold to earn $30,000 target operating income …..

6- What operating income would be resulted , if 7,000 tickets were sold?

7- What is the margin of safety ( units, value, %) would result if 7,000 tickets were sold?

8- Management would like to earn an after-tax income of $16,000. How many units must

be sold?

9- What selling price would have to be charged to give a target operating income of

$60,000 on sales of 8,000 tickets.

10- How many additional tickets must be sold to cover the extra cost of television

advertising of $8,000.

11- Assume that there is a proposed plan to pay $5/unit as a commission instead of paying

salespersons flat salaries that currently total $10,000. Do you accept that plan?
 Mgt Accounting [1] 3rd Year by Alaa Salama Part 07 page no. 3 of 11
Problem [1]
Houpe corporation produces and sell a single product. Data concerning that products,
selling price $140, variable expenses $42, & fixed expenses are $490,000 per month.
Consider each of the following questions independently. units = 6000

(1) The marketing manager believes that a $14,000 increase in the monthly advertising
budget would result in a 150 unit increase in monthly sales. What should be the
overall effect on the company's monthly net operating income of this change?
A) increase of $700 B) increase of $14,700
C) decrease of $14,000 D) decrease of $70

(2) Management is considering using a new component that would increase the unit
variable cost by $5. Since the new component would increase the features of the
company's product, the marketing manager predicts that monthly sales would increase
by 300 units. What should be the overall effect on the company's monthly net
operating income of this change?
A)decrease of $2,100 B)decrease of $27,900
C)increase of $2,100 D)increase of $27,900

(3) The marketing manager would like to cut the selling price by $7 and increase the
advertising budget by $28,000 per month. The marketing manager predicts that these
two changes would increase monthly sales by 500 units. What should be the overall
effect on the company's monthly net operating income of this change?
A) decrease of $17,500 B) increase of $17,500
C) decrease of $24,500 D) increase of $38,500

(4) The marketing manager would like to introduce sales commissions as an incentive
for the sales staff. The marketing manager has proposed a commission of $11 per unit.
In exchange, the sales staff would accept a decrease in their salaries of $58,000 per
month. (This is the company's savings for the entire sales staff.) The marketing
manager predicts that introducing this sales incentive would increase monthly sales by
100 units. What should be the overall effect on the company's monthly net operating
income of this change?
A) increase of $700 B) increase of $56,900
C) decrease of $115,300 D) increase of $588,700
 Mgt Accounting [1] 3rd Year by Alaa Salama Part 07 page no. 4 of 11
Problem [2]
ABC produces a single product & sells it for $60. The following information about unit
cost:
Direct materials $20 Direct Labor $10 Variable overhead $7
Total fixed manufacturing cost per month $10,000 VC = 3 $
Total fixed selling cost for the year $80,000
Required
1- Prepare contribution format income statement for 20XX if budget sales are
25,000 units
2- Calculate BE in units & dollars.
3- What is the monthly BE dollars.
4- What is the margin of safety ratio.
5- What is the degree of operating leverage.
6- What is the % change in net income, if sales decrease by 30%.
7- What is the operating income if sales are 8,000 units? Don’t prepare income
statement.

Problem [3]
Alex corporation has decided to introduce a new product. The product can be
manufactured using a capital-intensive method. The estimated manufacturing costs
are as follows:
Variable manufacturing cost per unit $14.00
Fixed manufacturing cost per year $2,440,000

The company's market research department has recommended an introductory selling

price of $30 per unit for the new product. The annual fixed selling and administrative
expenses of the new product are $500,000. The variable selling and administrative
expenses are $2 per unit regardless of how the new product is manufactured.
Required:
a. Calculate the break-even point in units.
b. Assumes sales of 250,000 units, what is the margin of safety.
c. Assumes sales of 250,000 units, what is the degree of operating leverage.
d. What will be the effect on the company’s income if sales increase by 10%.
 Mgt Accounting [1] 3rd Year by Alaa Salama Part 07 page no. 5 of 11
Problem [4]
Next year, Red Shirt Company expects to sell 32,000 shirts. Red is budgeting the
following operating results for next year .
Sales 800,000
Variable expenses 288 000
Contribution margin 512,000
Fixed expenses 192 000
Net income S320 000

1. What is Red's margin of safety for next year ?

a. 480,000 b. 500,000 c. 512,000
d. 608,000 e. None of the above answers is correct .

2. What is Red's degree of operating leverage for next year? (rounded if necessary)
1.50 1.56 c. 1.60 d. 2.50 e. 267

3. How many shirts would Red have to sell next year in order to generate S480,000 of
net income ?
a. 38,400 b. 48,000 c. 60,000 d. 96,000 e. 42,000

4. Red is considering increasing its advertising by S48,000 next year. By how much
would sales have to increase in order for Red to still generate a S320,000 net
income ?
$48,000 $75,000 S76,800 S120,000
None of the above answers is Correct.
 Mgt Accounting [1] 3rd Year by Alaa Salama Part 07 page no. 6 of 11
Problem [5]
Alex company produces & sells a single product with the following income statement
for 2008:
Sales (20,000 units) 2,400,000
Variable expenses 1,800,000
Contribution margin 600,000
Fixed expenses 400,000
Net income 200,000

Required
1. What are the contribution margin ratio and the break even sales dollars?

2. What is the degree of operating leverage at the current level of sales?

3. if management expects sales of 2009 to increase by 5% from the current level, what
will be the % of increase in net income? Don’t prepare income statement.

4. Refer to original data, if expected sales in 2009 amount $3,000,000 what will be the
operating income at this level of expected sales? Don’t prepare income statement.

5. In order to increase sales, management is studying a proposal to use higher quality

materials which will increase the unit variable cost by $6 and decrease fixed cost by
$100,000. The marketing manager expects the sales to increase by 20% from its
current level ,
a- prepare income statement based on this proposal
b- compute the break even in sales dollars
c- would you agree or disagree with the proposal? why?
 Mgt Accounting [1] 3rd Year by Alaa Salama Part 07 page no. 7 of 11
Problem [6]
Alex company produces & sells a single product with the following income statement
for 2008:
Sales (80,000 units) 3,000,000
Variable expenses 1,800,000
Contribution margin 1,200,000
Fixed expenses 960,000
Net income 240,000

Required
1. compute the margin of safety in sales dollars.

2. management is considering the use of new technology which is expected to reduce

the variable costs percentage by 40% from its current percentage but it will increase
fixed costs by $720,000 annually.
If the new technology is used:
a- What will be the sales dollars to maintain the same net operating
income for the year just ended.
b- What will be the breakeven sales dollars.

3. if you were a member of management team, would you be in favor of using the
new technology? Explain.
 Mgt Accounting [1] 3rd Year by Alaa Salama Part 07 page no. 8 of 11
Problem [7]
Given the following margin of safety for the current level of sales $200,000, if total
fixed cost $150,000 , VC% = 60% . what is the current level of sales$?

Problem [8]
The margin safety in Cairo Company is $48,000. The company’s sales are $240,000 and
its variable expenses $180,000 :
a- What are the company fixed expenses ?
b- if sales increase by $50,000, by how much net income will increase?

Problem [9]
Dorian Company produces and sells a single product. The product sells for $60 per unit
and has a contribution margin ratio of 40%.
The company's monthly fixed expenses are $28,800.
The variable expense per unit is:
A) $31.20. B) $24.00. C) $36.00. D) $28.80.

The break-even point in sales dollars is:

A) $48,000. B) $72,000. C) $28,800. D) $0.

Dorian Company desires a monthly net operating income equal to 10% of sales
monthly sales will be?

Problem [10]
Given the following DOL at current level of sales 5, sales $2,000,000 , net
income$300,000. what is the total fixed cost ?
 Mgt Accounting [1] 3rd Year by Alaa Salama Part 07 page no. 9 of 11
Problem [11]
Ales corporation expects the following result for the next year :
Sales $800,000
Margin of safety $200,000
Contribution margin ratio 75%
Degree of operating leverage 4

1. What is the expected total fixed cost for this company ?

2. Alex corporation wants to give its sales staff a $750,000 increase in salary but still
wants to make the same net operating income. If it gives this increase, by how much
would sales at les corporation have to increase in order to maintain its current
operating income level?

Problem [12]
Given the following data for Alex company For the year ended 12/31/2004
Sales $1,000,000
Net operating income 200,000
Degree of operating leverage 3 times
Required :
1 -What is the company's break-even point in dollar sales ?
2 -What the margin of Safety at this current level of sales ?

Problem [13]
ABC Company sells its product for a selling price of $500/unit. The variable cost
associated with this product is $300/unit including $10/unit sales commission & the
total fixed cost amounted $80,000.
Currently; the company sells 500 units & achieves net income of $20,000. If this
company has an opportunity to sell 150 units to a wholesaler without paying sales
commission, what price would it quote to the wholesaler if it wants to increase
monthly profits by $3,000 ?
 Mgt Accounting [1] 3rd Year by Alaa Salama Part 07 page no. 10 of 11
Problem [14]
The contribution margin ratio is 25% for Grain Company and the break-even point in
sales is $200,000. To obtain a target net operating income of $60,000, sales would
have to be :

Problem [15]
XYZ Company distributes a high-quality wooden birdhouse that sells for $20/unit.
Variable costs are $8/unit, & fixed costs total $186,000 per year.
Required:
Assume that the company sold 18,000 units last year, The president does not want to
change the selling price. Instead, he wants to increase the sales commission by
$1/unit, He thinks that this move, combined with some increase in advertising, would
increase annual sales by 25%. By how much could advertising be increased with
profits remaining unchanged ?

Problem [16]
Given the for Rawan sports that sells 2 types of balls — Flight Dynamic & Sure Shot :

1. prepare a contribution format income statement for the company as a whole.

2. Compute BE point for the company based on current sales mix.
3. Compute the share of each product in the BE sales .
4. If you know that the selling price per unit of Flight dynamic & Sure Shot is $30 & $25
respectively ;calculate the BE units for each product.
5. Compute the margin of safety.
6. Compute degree of operating leverage.
7. If total sales remain the same next year but sales of Flight Dynamic become
$250,000 & sales of Sure Shot become $150,000; what is the effect on net income &
breakeven? Why ?
8. If sales increase by 25% by how many dollars you expecting net operating income
to change.
9. If total sales next year expected to be $500,000; what be the expected net
operating income,.
Mgt Accounting [1] 3rd Year by Alaa Salama Part 07 page no. 11 of 11
Problem [17]
Given the information for a company that sells w/o products A & B :
Product A Product B
Units Sold 200 units 80 units
selling price per unit $ 4.00 $ 6.00
variable cost per unit $ 2.40 $ 1.20
Fixed expenses are $660 per month
Required :
1. Prepare income statement .
2. Compute Breakeven dollars & margin of safety %
3. The company has developed a new product (Product C) that sells for $8 with
variable expenses of $6. The company expect to sell 40 units per month from this
product without affecting quantity sold from products A & B
a. Prepare a new income statement.
b. Re-compute Breakeven dollars & margin of safety %
c. Explain what has happened to the breakeven dollars ,

Problem [18]
Alexandria company produces 2 products X & Y. the following information is presented
for both products for next year.
Product X Product Y
Sales $ 800,000 $ 1,200,000
variable cost % 60% 75%
Total Fixed expenses are $465,000 per month
Required :
1. what is the company’s net operating income next year.
2. what is the break-even total dollars of sales.
3. if total sales of the 2 products is the same but sales of product X become $900,000
and sales of product Y become $1,100,000 , would the break-even total dollars of
sales be higher or lower than your answer in “2”?why? answer without new
calculations.

End of Part 07 by Alaa Salama 010 27 383 483