Accounting Business Reporting for Decision Making

452 Accounting: Business Reporting for Decision Making

10.34  LO9

Yoklic Corporation currently manufactures a subassembly for its main product. The costs per

unit are as follows.

Direct materials

Direct labour

Variable overhead

Fixed overhead (allocated)

$ 4.00

30.00

15.00

25.00

Total $74.00

Regina Corp has contacted Yoklic Corporation with an offer to sell to it 5000 subassemblies for

$55 each.

Required

a. Why is it important to identify whether any of the fixed overhead is avoidable or unavoidable

in order to assess the outsourcing of the subassembly? Explain.

b. Should Yoklic Corporation make or buy the subassemblies? Create a schedule that shows the total

quantitative differences between the two alternatives. Assume all fixed overhead is unavoidable.

c. If Yoklic Corporation was able to eliminate $50 000 of fixed overhead, would it change your

decision in (b) above? Explain and show your calculations.

d. What qualitative factors should the accountants and managers of Yoklic Corporation consider

in their make or buy decision?

10.35  LO2, 6

Nail Transformation has provided the following financial data for the last two financial periods.

2016 2017

Nail services (units)

Sales

Less: Expenses

$

10 000

1 000 000

500 000

$

15 000

1 500 000

650 000

Profit $ 500 000 $ 850 000

The Manager, Hilda Polish, is beginning her planning for next year and requires the following

information.

a. Break-even level of sales in both units and sales dollars.

b. New machines are available for fast drying of nails and will cost $200 000 to purchase and

would lead to a reduction in variable costs of $0.50 per service. The new machines are to be

depreciated $40 000 per year. What is the new break-even point in both units and sales dollars?

c. What level of sales are required in 2018 to maintain the profit at $850 000 if the fast drying

machines are purchased?

10.36  LO10

Cisco Pty Ltd manufactures handheld beaters. For the first eight months of 2017, the company

reported the following operating results while operating at 80 per cent capacity.

Sales (400 000 units)

Cost of sales

$4 000 000

2 400 000

Gross profit

Operating expenses

1 600 000

900 000

Profit $ 700 000

Cost of sales was 65 per cent variable and 35 per cent fixed. Operating expenses were 60 per cent

variable and 40 per cent fixed.

In October, Cisco Pty Ltd receives a special order for 20 000 beaters at $6 each from Angel

Cakes located in New Zealand. Acceptance of the order would result in $5000 of shipping costs

but no increase in fixed operating costs.