Solution Question 1. (21 Marks)

1. What changes, if any, would you recommend be made to the Income Statement to render it more useful for management decision making purposes. (4 marks)

No distinction has been made between period expenses and product costs on the income statement prepared by Louganis.

Product costs (e.g., direct materials, direct labour, and manufacturing overhead) should be assigned to inventory accounts and flow through to the income statement as cost of goods sold only when finished products are sold.

Since there were ending inventories, some of the product costs should appear on the balance sheet as assets rather than on the income statement as expenses.

(2 marks for each change to a maximum of 4 marks)

2. Compute the cost of goods manufactured for the quarter. (12 marks)

MEDICAL TECHNOLOGY, INC.
Schedule of Cost of Goods Manufactured
For the Quarter Ended June 30

Direct materials:

Raw materials inventory, beginning (1/2 mark)
$ 0

Add: Purchases of raw materials (1 mark) 310,000

Raw materials available for use
310,000

Deduct: Raw materials inventory, ending (1 mark) 40,000

Raw materials used in production

$270,000
Direct labour (1 mark)

80,000
Manufacturing overhead:

Cleaning supplies, production (1 mark)
6,000

Indirect labour cost (1 mark)
135,000

Maintenance, production (1 mark)
47,000

Rental cost, facilities (80% × $65,000) (1 mark)
52,000

Insurance, production (1 mark)
9,000

Utilities (90% × $40,000) (1 mark)
36,000

Depreciation, production equipment (1 mark) 75,000

Total overhead costs

360,000
Total manufacturing costs

710,000
Add: Work in process inventory, beginning (1/2 mark)

0

710,000
Deduct: Work in process inventory, ending (1 mark)

30,000
Cost of goods manufactured

$680,000

3. After reviewing the company’s records, the insurance company has offered to settle for an amount of $150,000. Should the company accept the offer? Your answer must be supported by appropriate numerical analysis. (5 marks)

The cost of the 4,000 monitors in the ending finished goods inventory must be determined. Altogether, the company produced 20,000 units during the quarter; thus, the production cost per unit would be:

Since 4,000 monitors (20,000 – 16,000 = 4,000) were in the ending finished goods inventory, the total cost of this inventory would be:

4,000 units × $34 per unit = $136,000.

Based on the above analysis, the company should accept the $150,000 settlement from the insurance company.

Question 2. Solution (15 marks)
1. (3 Marks)
PDOH = $1,530,000 / 85,000 = $18
2. (3 Marks)
Applied OH = $18 x 60,000 = $1,080,000
Actual OH = $1,350,000
Under applied = $ 270,000
3. (2 marks)
COGS = $2,800,000 + $270,000 = $3,070,000
4. (4.5 Marks) $ % Allocated ($270,000)
WIP $43,200 4 $10,800
FG $280,800 26 $70,200
COGS $756,000 70 $189,000
Total $1,080,000 100 $270,000
5. (2.5 Marks)
NI will be higher by ($189,000-$270,000) $81,000.
Solution Question 3. (15 Marks)

a. (5 Marks)

Break-even quantity = Fixed costs / Unit contribution margin

Fixed costs = $50 × 60,000 + $250,000 = $3,250,000

Unit contribution margin = $13,500,000 / 54,000 – $165 = $250 – $165 = $85

Break-even quantity ($3,250,000 / $85) 38,235.29 units (or 38,236 units)

Price per unit ($13,500,000 / 54,000) $250.00

Break-even sales dollars $ 9,558,822.50 (or $9,559,000)

b. (10 Marks)

i) Step 1: Find the current after tax profit.

Contribution margin ($85 × 54,000) $ 4,590,000

Fixed costs 3,250,000

Income before tax 1,340,000

Tax at 40% 536,000

Profit after tax $ 804,000

Step 2: Determine the cost structure of the new machine and the unit contribution margin.

The new fixed costs will be $320,000 higher than before and will equal