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QUESTION 2 (a) Explain the following terms: () margin of safety (i) contribution margin (ii) (b) contribution to sales ratio (iv) (c) cost behaviour in a linear function

QUESTION 2 (a) Explain the following terms: () margin of safety (i) contribution margin (ii) (b) contribution to sales ratio (iv) (c) cost behaviour in a linear function

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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QUESTION 2 (a) Explain the following terms: (1) margin of safety (ii) contribution margin (b) contribution to sales ratio (ii) (iv) (c) cost behaviour in a linear function (v) (d) break even analysis The Income statement for the year ending 31 December 2020 for Hagemaru Manufacturing is as follows: RM'000 RM'000 Sales (22,000 units) 3,300 Direct materials 726 Direct labour 374 Production overheads 798 (1,898) Gross profit 1,402 Selling overheads (1,042) Net profit 360 The variable production overheads were RM9 per unit while the variable selling overheads were RM11 per unit. Required: (i) Calculate contribution margin per unit. (i) (ii) Calculate breakeven point in units and in RM. (i) Calculate margin of safery in units for the latest financial year. The company has a capacity of 30,000 units per year. Management is not happy with the financial performance for the last year, and two courses of (iv) (v) (vi) action for the coming year were proposed in the recent management meeting: (vii) (vii) The sales manager believed that unit volume would increase by 30% with additional expenses of RM200,000 on advertising. (ix) (vi) The general manager considered that full capacity could be reached if the selling price were cut by 10%. In addition, the direct material cost woulkd be reduced by 5% following a minor modification of the specification of the product. Required: Prepare the budgeted income statement for the coming year using a contribution margin approach, under each alternative.
Transcribed Image Text:QUESTION 2 (a) Explain the following terms: (1) margin of safety (ii) contribution margin (b) contribution to sales ratio (ii) (iv) (c) cost behaviour in a linear function (v) (d) break even analysis The Income statement for the year ending 31 December 2020 for Hagemaru Manufacturing is as follows: RM'000 RM'000 Sales (22,000 units) 3,300 Direct materials 726 Direct labour 374 Production overheads 798 (1,898) Gross profit 1,402 Selling overheads (1,042) Net profit 360 The variable production overheads were RM9 per unit while the variable selling overheads were RM11 per unit. Required: (i) Calculate contribution margin per unit. (i) (ii) Calculate breakeven point in units and in RM. (i) Calculate margin of safery in units for the latest financial year. The company has a capacity of 30,000 units per year. Management is not happy with the financial performance for the last year, and two courses of (iv) (v) (vi) action for the coming year were proposed in the recent management meeting: (vii) (vii) The sales manager believed that unit volume would increase by 30% with additional expenses of RM200,000 on advertising. (ix) (vi) The general manager considered that full capacity could be reached if the selling price were cut by 10%. In addition, the direct material cost woulkd be reduced by 5% following a minor modification of the specification of the product. Required: Prepare the budgeted income statement for the coming year using a contribution margin approach, under each alternative.
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