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MGT 223 - 2011 exam solution. pdf

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University of Toronto Mississauga
Minlei Ye

PART I MULTIPLE CHOICE QUESTIONS (20 marks – 2 marks each) Answers for the Multiple Choice Questions 1 2 3 4 5 6 7 8 9 10 B D D A C B B C A B PART II SHORT-ANSWER QUESTIONS (10 marks) 1. What are the typical underlying assumptions of CVP analysis? Please briefly explain the assumptions. (5 marks) 1) Selling price is constant throughout the entire relevant range. The price of a product or service will not change as volume changes. 2) Costs are linear throughout the entire relevant range, and they can accurately be divided into variable and fixed elements. The variable element is constant per unit, and the fixed element is constant in total over the entire relevant range. 3) In multiproduct companies, the sales mix is constant. 4) In manufacturing companies, inventories do not change. The number of units produced equals the number of units sold. MGT223H5S – Final Examination Page 1 of 9 2. What is a participative budget? What are the major advantages of participative budgets? What caution must be exercised in their use? (5 marks) A participative budget is one in which persons with responsibility over cost control prepare their own budgets. This is in contrast to a budget that is imposed from above. The major advantages of a participative budget are: (1) Individuals at all levels of the organization are recognized as members of the team whose views and judgments are valued. (2) Budget estimates prepared by front-line managers are often more accurate and reliable than estimates prepared by top managers who have less intimate knowledge of markets and day-to-day operations. (3) Motivation is generally higher when individuals participate in setting their own goals than when the goals are imposed from above. Participative budgets create commitment. (4) A manager who is not able to meet a budget that has been imposed from above can always say that the budget was unrealistic and impossible to meet. With a self-imposed budget, this excuse is not available. Participative budgets do carry with them the risk of budgetary slack. The budgets prepared by lower-level managers should be carefully reviewed to prevent too much slack. MGT223H5F – Final Examination Page 2 of 9 Section III 5 Problems (70 marks) Problem 1 Cost-Volume-Profit Analysis (15 MARKS) 1. What are total sales in dollars at the break-even point? (3 marks) CM% = CM/Sales = 400,000/1,200,000 = 1/3 BEP in sales = Fixed expenses / CM% = 300,000 / (1/3) = 900,000 2. How many units does the company have to sell in order to break-even? (3 marks) Units sold = 1,200,000 / 60 = 20,000 units CM per unit = 400,000 / 20,000 = $20 BEP in units = Fixed expenses / CM per unit = 300,000 / 20 = 15,000 3. If sales increase by 100 units and fixed expenses increase by $1,000, by how much would operating income increase or decrease? (3 marks) Increase in CM: 100* 20 = 2,000 Increase in Fixed expenses: 1,000 Therefore, operation income will increase by 2,000-1,000 = $1,000 4. How many units would the company have to sell to attain net income after tax of $225,000? The tax rate is 40%. (3 marks) NIBT = NIAT / (1 – Tax Rate) = 225000/(1-40%) =375,000 Units to sell = (Fixed expenses + NIBT) / CM per unit = (300,000 + 375,000) / 20 = 33,750 units 5. How much is the Arkadia Corporation's net operating leverage? If sales dollars increase by 10%, how much will net operating income increase (in percentage)? (3 marks) Net operating leverage = CM / operating income = 400,000 / 100,000 = 4 Therefore, if sales increase by 10%, operating income will increase by 4*10% = 40%. MGT223H5F – Final Examination Page 3 of 9 Problem 2 Variable Costing and Absorption Costing (15 MARKS) 1. What was the total contribution margin for the month under the variable costing approach? (3 marks) CM per unit = price – vc per unit = 90- (23+11+2+8)=90 – 44 = 46 Total CM = 46 * 3,400 = 156,400 2. What was the total gross margin for the month under the absorption costing approach? (3 marks) Total gross margin = sales revenue – COGS = 90 * 3,400 – unit product cost* 3,400 =306,000 – ((23+11+2)*3600+93600)/3600 * 3400 = 306,000 – 62*3400 =95,200 3. What was the total period cost for the month under the variable costing approach? (3 marks) Total variable selling and administrative expenses + fixed selling and administrative expenses + fixed MOH =8*3400 + 61,200 + 93,600= 182,000 4. What was the total period cost for the month under the absorption costing approach? (3 marks) Total variable selling and administrative expenses + fixed selling and administrative expenses = 8*3400 + 61,200 = 88,400 5. Would you expect variable costing or absorption costing to show higher operating income concerning its most recent month of operations in Gabbert Company? Please explain why. (3 marks) We would expect absorption costing will show higher operating income than variable costing. Since the company produced 3,600 units, which is greater than 3,400 units sold, inventories increase and under absorption costing part of the fixed manufacturing overhead cost of the current period is defe
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