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Questions:
1. What is the breakeven point in units and sales dollars for the year for each type of cake?

2. Calculate the number of each type of cake and their dollar values that must be sold to beak-even, assuming that the tax rate is 30 per cent. Explain your results.

3. Calculate the margin of safety in units and dollars for a year assume the budgeted sales is the same as given figures in Part 1. Explain your results.

4. Use the degree of operating leverage to investigate the impact of 20% increase and 20% decrease in the sales revenue on profit. Explain your results.

5. If it is expected that fluctuations in sales will rise, what is your recommendation about the cost structure for this business?

6. Calculate the number of each type of cake and their dollar values that must be sold to achieve a targeted after tax profit of $150,000 assuming that the tax rate is 10 per cent.

7. If the fixed cost increases by $20,000 per year and the variable cost decreases by 10%. How many of each type of cake do they need to sell to breakeven assuming the same sales mix?

8. If the variable cost per cake increases by 15% and selling price by 20%, what would be the profit?

9. What is the new break-even point, if both fixed costs and contribution margins increase by 20%? Explain your results.

10. What is the new break-even point if the number of units sold increases by 25%? Explain your results
Answers: 
Assignment Part 1

Month

No of Days

 

 

 

Total Cakes

(1) Oven electricity usage (kwh)

(2)Other electricity usage (kwh)

(3) Total electricity usage (kwh)

Cake 1

Cake 2

Cake 3

1

31

    5,700.00

    1,900.00

    1,900.00

         9,500.00

    12,825.00

        250.00

   13,075.00

2

28

    5,280.00

    1,760.00

    1,760.00

         8,800.00

    11,880.00

        249.00

   12,129.00

3

31

    4,500.00

    1,500.00

    1,500.00

         7,500.00

    10,125.00

        261.00

   10,386.00

4

30

    3,900.00

    1,300.00

    1,300.00

         6,500.00

      8,775.00

        337.90

     9,112.90

5

31

    4,320.00

    1,440.00

    1,440.00

         7,200.00

      9,720.00

        489.00

   10,209.00

6

30

    4,500.00

    1,500.00

    1,500.00

         7,500.00

    10,125.00

        607.20

   10,732.20

7

31

    4,920.00

    1,640.00

    1,640.00

         8,200.00

    11,070.00

        638.40

   11,708.40

8

31

    4,980.00

    1,660.00

    1,660.00

         8,300.00

    11,205.00

        697.50

   11,902.50

9

30

    5,100.00

    1,700.00

    1,700.00

         8,500.00

    11,475.00

        480.00

   11,955.00

10

31

    5,400.00

    1,800.00

    1,800.00

         9,000.00

    12,150.00

        337.90

   12,487.90

11

30

    5,640.00

    1,880.00

    1,880.00

         9,400.00

    12,690.00

        246.00

   12,936.00

12

31

    6,000.00

    2,000.00

    2,000.00

       10,000.00

    13,500.00

        400.00

   13,900.00

Total

365

  60,240.00

  20,080.00

  20,080.00

     100,400.00

  135,540.00

     4,993.90

 140,533.90

Requirement-1: Analysis of Two Electricity Providers

Electricity provider 1

Monthly Usage (Kwh)

Price (Cents)

Amount ($)

3350

29.8

       998.30

5500

30

       645.00

5500

30.01

  40,523.67

 

 

  42,166.97

Supply charges @ $4.012 per day

 

    1,464.38

Total

 

  43,631.35

 

Electricity provider 2

Monthly Usage (Kwh)

Price (Cents)

Amount ($)

2550

29.55

        753.53

5500

29

        855.50

5500

28.75

   38,822.25

 

 

   40,431.27

Supply charges @ $5 per day

 

     1,825.00

Total

 

   42,256.27

It could be observed that electricity provider 2 is providing electricity at cheaper rates than electricity provider 1.

Requirement 2: Comparing the electricity cost of these two electricity providers for different levels of monthly productions

Months

Total cakes

Total Electricity Cost including supply charge

Rent

Other expenses

Direct Material Cost

Direct Labor Cost

1

9800

    3,941.84

    2,500.00

    8,000.00

    4,900.00

    29,400.00

2

8000

    3,654.86

    2,500.00

    6,000.00

    4,000.00

    24,000.00

3

7000

    3,168.75

    2,500.00

    5,500.00

    3,500.00

    21,000.00

4

6500

    2,797.73

    2,500.00

    7,500.00

    3,250.00

    19,500.00

5

7200

    3,117.86

    2,500.00

    7,536.00

    3,600.00

    21,600.00

6

7000

    3,263.28

    2,500.00

    9,565.00

    3,500.00

    21,000.00

7

8000

    3,548.94

    2,500.00

    9,676.00

    4,000.00

    24,000.00

8

8300

    3,604.74

    2,500.00

  10,007.00

    4,150.00

    24,900.00

9

8500

    3,614.84

    2,500.00

    7,589.00

    4,250.00

    25,500.00

10

9000

    3,773.05

    2,500.00

    6,700.00

    4,500.00

    27,000.00

11

9500

    3,896.88

    2,500.00

    9,900.00

    4,750.00

    28,500.00

12

10000

    4,179.03

    2,500.00

  10,000.00

    5,000.00

    30,000.00

Total

98800

  42,561.80

  30,000.00

  97,973.00

  49,400.00

  296,400.00

The excel file prepared as shown above incorporates the use of IF Function which works based on logics (Reding and Wermers, 2007). This Excel can be used as the tool to compare the monthly electricity cost of two electricity providers. The electricity cost of the respective electricity providers will automatically change upon a change made in the total electricity consumption. Further, the total electricity consumption is also linked to the basic data variables being used in its computation.  

Assignment part 2: Table Completed

Months

Total cakes

Total Electricity Cost including supply charge

Rent

Other expenses

Direct Material Cost

Direct Labor Cost

1

      9,500.00

    3,941.84

    3,000.00

      8,800.00

    5,700.00

    38,000.00

2

      8,800.00

    3,654.86

    3,000.00

      9,500.00

    5,280.00

    35,200.00

3

      7,500.00

    3,168.75

    3,000.00

      8,003.00

    4,500.00

    30,000.00

4

      6,500.00

    2,797.73

    3,000.00

      7,500.00

    3,900.00

    26,000.00

5

      7,200.00

    3,117.86

    3,000.00

      7,536.00

    4,320.00

    28,800.00

6

      7,500.00

    3,263.28

    3,000.00

      9,565.00

    4,500.00

    30,000.00

7

      8,200.00

    3,548.94

    3,000.00

      9,676.00

    4,920.00

    32,800.00

8

      8,300.00

    3,604.74

    3,000.00

    10,007.00

    4,980.00

    33,200.00

9

      8,500.00

    3,614.84

    3,000.00

      8,544.00

    5,100.00

    34,000.00

10

      9,000.00

    3,773.05

    3,000.00

    10,454.00

    5,400.00

    36,000.00

11

      9,400.00

    3,896.88

    3,000.00

      9,900.00

    5,640.00

    37,600.00

12

    10,000.00

    4,179.03

    3,000.00

    10,000.00

    6,000.00

    40,000.00

Total

  100,400.00

  42,561.80

  36,000.00

  109,485.00

  60,240.00

  401,600.00

Requirement 1: Cost Classification

The fixed cost comprises such cost items that do not change with the change in production level (Kinney and Raiborn, 2010). In the case of Aussie Bakery, rent and surcharge on electricity does not seem to be changing with the change in production level.  There these two cost items are to be classified as fixed cost.  In contrast to fixed cost, the variable cost includes the items of cost which change in tandem to the change in level of output. The Aussie Bakery incurs direct material and direct labor in the production of cakes which can be classified as variable cost because cost of these items change with the change in number of cakes produced.

Further, apart from the fixed and variable cost, there is another category of cost classification that is mixed cost (Kinney and Raiborn, 2010). The cost of some items remains fixed for certain level of output and then changes. These items are classified under mixed cost category. In the case of Aussie Bakery, the electricity cost and other cost is to be classified as mixed cost.

Requirement-2: Graph for Each Cost to Demonstrate its Behavior 

From the scatter graph presented above, it could be observed that direct material and direct labor costs are changing with the change in the production of cakes. Further, the rent cost could be observed to be static. The electricity and other costs are fixed for certain level of output and then these costs are changing.  

Requirement 3: Mixed Cost Segregation 

High Low Method

Mixed Cost: Electricity

Level

Total cakes

Electricity Cost ex supply charge

Highest

    10,000.00

    4,024.03

Lowest

      6,500.00

    2,647.73

Difference

      3,500.00

    1,376.29

Variable per cake

           0.39

Fixed

         91.76

Mixed Cost: Other Costs

Level

Total cakes

Total Other Cost

Highest

    10,000.00

  10,000.00

Lowest

      6,500.00

    7,500.00

Difference

      3,500.00

    2,500.00

 

 

 

Variable per cake

           0.71

Fixed

    2,857.14

Regression Method
Mixed Cost: Electricity        

 

df

SS

MS

F

Significance F

 

Regression

1

1692388.72

1692388.715

752.392512

9.60715E-11

 

Residual

10

22493.4285

2249.342847

 

Total

11

1714882.14

 

 

 

 

 

 

 

Coefficients

Standard Error

t Stat

P-value

Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept

253.5640389

115.332279

2.198552233

0.05256972

-3.412291074

510.540369

-3.41229

510.5404

X Variable 1

0.375438524

0.01368726

27.42977419

9.6072E-11

0.344941402

0.40593565

0.344941

0.405936

Fixed Electricity Cost:                        $253.56

Variable Electricity Cost:                    $0.38 per cake

Mixed Cost: Other Cost

 

df

SS

MS

F

Significance F

 

Regression

1

5486073.51

5486073.515

9.25175578

0.01242711

 

Residual

10

5929764.74

592976.4735

 

Total

11

11415838.3

 

 

 

 

 

 

 

Coefficients

Standard Error

t Stat

P-value

Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept

3468.236396

1872.58602

1.852110591

0.09372023

-704.1452454

7640.61804

-704.145

7640.618

X Variable 1

0.675957801

0.22223247

3.041669899

0.01242711

0.180793013

1.17112259

0.180793

1.171123

Fixed Other Cost:                   $3,468.24

Variable Other Cost:               $0.68 per cake 

Requirement-4:

When labor and other costs are considered based on high low method

 

Cakes

 

6400

8900

9900

Variable

 

 

 

Direct material@ $0.60

      3,840.00

    5,340.00

    5,940.00

Direct labor@ $4

    25,600.00

  35,600.00

  39,600.00

Electricity@ $0.39

      2,496.00

    3,471.00

    3,861.00

Other cost @ $0.71

      4,544.00

    6,319.00

    7,029.00

Total (a)

    36,480.00

  50,730.00

  56,430.00

Fixed

 

 

 

Rent

      3,000.00

    3,000.00

    3,000.00

Supply charge

         150.00

       150.00

       150.00

Electricity

           91.76

         91.76

         91.76

Other cost

      2,857.14

    2,857.14

    2,857.14

Total (b)

      6,098.91

    6,098.91

    6,098.91

Grand Total (a+b)

    42,578.91

  56,828.91

  62,528.91

 

When labor and other costs are considered based on regression analysis

 

Cakes

 

6400

8900

9900

Variable

 

 

 

Direct material@ $0.60

      3,840.00

    5,340.00

       5,940.00

Direct labor@ $4

    25,600.00

  35,600.00

     39,600.00

Electricity@ $0.38

      2,432.00

    3,382.00

       3,762.00

Other cost @ $0.68

      4,352.00

    6,052.00

       6,732.00

Total (a)

    36,224.00

  50,374.00

     56,034.00

Fixed

 

 

 

Rent

      2,500.00

    2,500.00

       2,500.00

Supply charge

         150.00

       150.00

          150.00

Electricity

         253.56

       253.56

          253.56

Other cost

      3,468.24

    3,468.24

       3,468.24

Total (b)

      6,371.80

    6,371.80

       6,371.80

Grand Total (a+b)

    42,595.80

  56,745.80

     62,405.80

It could be observed from the above computations that as the output increases the total cost under regression method is reducing down as compared to

Requirement 1: Breakeven Point

 

Cake-1

Cake-2

Cake-3

Total

A. Selling Price

             7.00

             6.50

             7.20

 

Less: Variable Cost

             5.66

             5.66

             5.66

 

B. Contribution per cake

             1.34

             0.84

             1.54

 

C. Sales Mix (Based on Volume)

60%

20%

20%

 

D. Composite contribution per cake

 

 

 

             1.28

E. PV ratio (C/A)

19%

13%

21%

 

F. Composite PV ratio

 

 

 

18.35%

G. Fixed Cost annual

 

 

 

    76,461.61

H. Total BEP (Cakes) [G/D]

                  -

                  -

                  -

    59,735.63

I. BEP (Cakes) [H*C]

         35,841

         11,947

         11,947

 

J. BEP ($) [G/F]

 

 

 

  416,727.48

K. BEP ($) [J*C]

  250,036.49

    83,345.50

    83,345.50

 

The income tax expense does not form part of fixed cost taken for computation of breakeven point. Thus, the impact of taxation would be nil on the computation of breakeven levels. Therefore, the results of breakeven as arrived in the requirement-1 would not change due to consideration of tax expense (Cafferky, 2010).

Requirement 3: Margin of safety

 

Cake-1

Cake-2

Cake-3

A. Selling Price

             7.00

             6.50

             7.20

B. Current sale units

    60,240.00

    20,080.00

    20,080.00

C. Total Current Sales

  421,680.00

  130,520.00

  144,576.00

D. BEP sales

  250,036.49

    83,345.50

    83,345.50

E. Margin of Safety (C-D)

  171,643.51

    47,174.50

    61,230.50

E. Margin of Safety % (E/C)

40.70%

36.14%

42.35%

    

Explanation: The margin of safety indicates profit making capacity of the products being manufactured and sold by a firm (Cafferky, 2010). It could be observed that in the current case, cake-3 is yielding the highest margin of safety of 42.35%. This depicts that cake-3 is the most profitable product for the Bakery followed by cake-1.

Operating Leverage Impact Analysis

 

Cake-1

Cake-2

Cake-3

A. Current Contribution

    80,721.60

    16,867.20

    30,923.20

B. Fixed cost allocated in sales mix

    45,876.96

    15,292.32

    15,292.32

C. Operating Income (A-B)

    34,844.64

      1,574.88

    15,630.88

D. Operating Leverage

             2.32

           10.71

             1.98

Impact on Profit of Increase/decrease in Sales by 20%

D. % Increase/ decrease in profit (D*20%)

46.33%

214.20%

39.57%

 

Impact Analysis: The degree of operating leverage provides for computation of impact on the profits of increase or decrease in sales (Cafferky, 2010). The degree of operating leverage is computed by dividing contribution with operating income. It could be observed that cake-2 has the highest degree of operating leverage of 10.71 times. In this case, it indicates that if the sales of cake-2 increase or decreases by 20%, the operating profit will increase or decrease by 214.20%.

In regard to the current cost structure of Aussie Bakery it could be observed that variable costs are high as depicted from the low contribution margin of 18.35%. Since the variable costs are high, the fluctuation in the sales caused by price change would not have much impact on the profitability of the firm. The firm will not be able to get the benefits of increase in sales price to the fullest due to high variable costs. Therefore, it is recommended to reduce the variable costs so that contribution margin could be improved to reap out the benefits of increase in sales price (Cafferky, 2010).  

No of Cakes to Earn Targeted Income

 

Cake-1

Cake-2

Cake-3

Total

A. Fixed Cost Annual

 

 

 

       76,461.61

B. Target Income after tax

 

 

 

     150,000.00

C. Tax @ 10% (B/90%*10%)

 

 

 

       16,666.67

D. Target Income before tax (D+C)

 

 

 

     166,666.67

E. Total contribution needed (A+D)

 

 

 

     243,128.27

F. Composite contribution per cake

 

 

 

                1.28

G. Total cakes needed (F/G)

 

 

 

     189,943.96

H. Cakes needed category wise

  113,966.38

    37,988.79

    37,988.79

 

I. Composite PV ratio

 

 

 

                0.18

J. Total Sales needed ($) [E/J]

 

 

 

  1,325,086.38

K. Sales needed category wise

  795,051.83

  265,017.28

  265,017.28

 

Breakeven Point

 

 Cake-1

 Cake-2

 Cake-3

 Total

A. New Fixed Cost

 

 

 

       96,461.61

B. New Composite contribution per cake

 

 

 

                1.41

(1.28*110%)

 

 

 

 

C. Total BEP (Cakes)

 

 

 

       68,509.66

D. BEP category-wise

    41,105.80

    13,701.93

    13,701.93

 

Note: The decrease in variable cost of 10% will increase the PV ratio by 10%.

 

 Cake-1

 Cake-2

 Cake-3

 Total

A. New selling price

             8.40

             7.80

             8.64

 

B. New Variable cost

             6.51

             6.51

             6.51

 

C. New Contribution per unit (A-B)

             1.89

             1.29

             2.13

 

D. No of cakes

    60,240.00

    20,080.00

    20,080.00

 

E. Total contribution (C*D)

  113,913.84

    25,923.28

    42,790.48

     182,627.60

F. Total Fixed Cost

 

 

 

       76,461.61

G. Operating Profit (E-F)

 

 

 

     106,165.99

 

 Cake-1

 Cake-2

 Cake-3

 Total

A. New fixed cost

 

 

 

       91,753.93

B. New PV ratio

 

 

 

22.02%

C. Total BEP ($)

 

 

 

     416,727.48

D. Category-wise

  250,036.49

    83,345.50

    83,345.50

 

Explanation: The new BEP could be observed to be same as it was before these changes. This is because the fixed cost and contribution margin both have increased by same percentage.

 

 Cake-1

 Cake-2

 Cake-3

 Total

A. Fixed cost

 

 

 

       76,461.61

C. PV ratio

 

 

 

18.35%

D. BEP (cakes)

 

 

 

     416,727.48

E. Category-wise

  250,036.49

    83,345.50

    83,345.50

 

Explanation: The increase in sales units by 25% will increase the sales revenues but simultaneously it will also give rise to variable cost by the same percentage. Hence, the contribution margin will remain unaffected. As the contribution margin is same, the breakeven point will also remain the same (Cafferky, 2010).

Computation of cost per cake

Cost Driver: Labor hours

 

Cake-1

Cake-2

Cake-3

A. Direct material

      36,144.00

    12,048.00

    12,048.00

B. Direct labor

    240,960.00

    80,320.00

    80,320.00

C. Manufacturing overhead per hour ($194,521/17,250)

             11.28

           11.28

           11.28

D. Total labor hours

      10,040.00

      3,346.67

      3,346.67

E. Total Manufacturing overhead (C*D)

    113,216.86

    37,738.95

    37,738.95

D. Cost per cake (A+B+E)

    390,320.86

  130,106.95

  130,106.95

Cost Driver: Labor cost

A. Direct material

      36,144.00

    12,048.00

    12,048.00

B. Direct labor

    240,960.00

    80,320.00

    80,320.00

C. Manufacturing overhead % to labor cost

56%

56%

56%

D. Total Manufacturing overhead (C*B)

    135,860.23

    45,286.74

    45,286.74

E. Cost per cake (A+B+D)

    412,964.23

  137,654.74

  137,654.74

Cost Driver: Oven hours

A. Direct material

      36,144.00

    12,048.00

    12,048.00

B. Direct labor

    240,960.00

    80,320.00

    80,320.00

C. Manufacturing overhead per oven hour ($194,521/6,210)

             31.32

           31.32

           31.32

D. oven hours used

        3,012.00

      1,204.80

      1,204.80

E. Total Manufacturing overhead (C*D)

      94,347.38

    37,738.95

    37,738.95

D. Cost per cake (A+B+E)

    371,451.38

  130,106.95

  130,106.95

The allocation of overheads could be based on different factors such as labor hours, labor cost, and machine hours (Oven hours). The cost of overhead being allocated would differ depending upon the type of cost driver applied. It could be observed from the results of requirement-1 that manufacturing overheads allocated based on labor hours are $113,216.86, 37,738.95 and 37,738.95 for cake-1, 2, and 3 respectively. Further this allocation changes when the allocation base is changed to labor cost. In that case the manufacturing overheads would be allocated as $135,860.30, 45,286.74, and 45,286.74. Further, when the Oven hours are used, the manufacturing overheads allocated changes to $94,347.38, 37,738.95, and 37,738.95. 

Requirement 3: Over applied or under applied overhead for the year

 

Labor hours

Labor cost

Oven hours

Total applied overheads (A)

    188,694.77

  226,433.72

  169,825.29

Actual Overheads

 

 

 

Rent

      36,000.00

    36,000.00

    36,000.00

Electricity cost

      42,561.80

    42,561.80

    42,561.80

Other costs

    109,485.00

  109,485.00

  109,485.00

Total (B)

    188,046.80

  188,046.80

  188,046.80

Over/ (Under) Applied (A-B)

           647.97

    38,386.92

  (18,221.51)

References

Cafferky, M. 2010. Breakeven Analysis: The Definitive Guide to Cost-Volume-Profit Analysis

Kinney, M.R. and Raiborn, C.A. 2010. Cost Accounting: Foundations and Evolutions. Cengage Learning.

Managerial Accounting Collection. Business Expert Press.

Reding, E.E. and Wermers, L. 2007. Microsoft Office Excel 2007 - Illustrated Complete. Cengage Learning.

Vanderbeck, E.V. and Mitchell, M.R. 2015. Principles of Cost Accounting. Cengage Learning. 

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