3 question about costing

Dr. Mojahid F. Saeed Osman/ISE304.01/Term132/February 20, 2014

ISE304.01 Principles of Industrial Costing

Term: Second Semester 2013-14 (132)

Homework Assignment 2 Due on Sunday March 2, 2014 at or before 01:30 PM

Submission Instructions:

• Make sure your name is listed on a cover sheet as the first page of the document.

• Each question should be numbered. • Hand written homework will be accepted. However, you will have a credit of 5% of the total

possible points for typing the entire homework in MS word.

Read Chapter 3.

1. A manufacturer is considering the introduction of a new product with the following data for the current year 2014:

Expected sales 25,000 units

Expected Revenue 12,000,000SR

Variable Costs:

Total Direct materials 1,000,000

Total Direct labor 2,000,000

Total Variable overhead 600,000

Fixed Costs (annual):

Manufacturing 600,000

Selling 400,000

Administrative 800,000

Income tax rate 25%

(a) What is the after-tax operating profit? (3 points) (b) What number must the company sell to break even? (3 points) (c) To attain the sales target of 32,000 units will require additional fixed manufacturing cost of

200,000SR and additional total material cost of 300,000, with other costs remaining constant.

What will be the before-tax operating profit? (3 points)

(d) What would be the break-even point in sales dollars if the company spends the additional 500,000SR (fixed + material)? (2 points)

(e) if the company spends the additional 500,000SR, what is the sales in dollars required to make the before-tax operating profit in question (a) above? (2 points)

(f) At sales level of 30,000 units, what is the maximum additional amount the company can spend on manufacturing fixed costs to earn after-tax operating profit of 3,000,000SR?(assuming other

costs remaining constant) (3 points)

2. Assume that a manufacturing firm is considering the production of four products for the year 2014 with the following data:

Product W Product X Product Y Product Z

Unit Price 120SR 70SR 40SR 10SR

Unit Variable cost 25 18 15 4

Unit sold per year 150 950 1400 11,000

KING FAHD UNIVERSITY OF PETROLEUM & MINERALS Systems Engineering Department

ISE304.01 Principles of Industrial Costing 2 nd

Semester 2013-14

Dr. Mojahid F. Saeed Osman/ISE304.01/Term132/HW2/February 20, 2014 2

The firm has fixed costs of 100,000SR and would be subjected to a 25% tax on income. (a) How much the firm will earn after-tax operating profit for 2014? (3 points) (b) Assuming the above sales mix is the same at break-even point, at what sales dollars does the firm

break even? (3 points)

(c) Assuming the above sales mix, at what sales revenue will the firm earn 200,000SR after tax in 2014? (3 points)

(d) What would be the break-even point in sales dollars for 2014 if the number of units sold of product W and X remained the same and the number of units of product Y dropped to zero, while the

number of units sold of product Z increased to 14,000.With this change in production mix, the firm

would increase its fixed costs 20%. What would be the impact of this change in product mix on the

operating profit after tax for 2014? (5 points)

Read Chapter 4.

3. A manufacturing Company can produce 40,000 items per year. The following information relates to the company for the current year.

Revenue 800,000SR

Manufacturing cost

Total variable 200,000

Fixed 150,000

Selling and administrative cost

Total commission on sales 20,000

Fixed 15,000

a) During the year, a retailer offered the company to buy 8,000 items for 16SR each. These items will incur all the variable costs for items produced. The fixed costs are not affected by the decision.

However, the special order would increase the commission on sales by 10%

Should the company accept the special order? Explain.(5 points)

b) If the retailer needs instead a total of 5,000 items and still pays 16SR each (all other information remains the same), should the company accept the special order? Explain. (5 points)

Show your work

Total Possible Points: 40