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INDIVIDUAL ASSIGNMENT – MANAGERIAL ACCOUNTING

AFRICAN LEADERSHIP INSTITUTE


ASSIGNMENT COVER SHEET
TITLE OF PROGRAMME: MASTERS IN BUSINESS
ADMINISTRATION(MBA)

NAME OF MODULE: MANAGERIAL ACCOUNTING


NAME OF STUDENT: ALBERT MUNYANYI
CELLPHONE NUMBER: +263 773 609 000
INTAKE NUMBER: 7
ASSIGNMENT TITLE:

NAME OF LECTURER: DR. KARAMBWE


DATES OF LECTURE:…………………………….........................................................

Lecturer to complete the following section:


ASSIGNMENT DUE DATE:……………………………………………………………………….
MARK ALLOCATION: ………………………..............................................................

COMMENTS:
……………………………………………………………………………...........................
……………………………………………………………………………............................
……………………………………………………………………………............................
LECTURER’S SIGNATURE: ……………….........DATE: ………………......

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INDIVIDUAL ASSIGNMENT – MANAGERIAL ACCOUNTING

Question:
Makuti Bottled Drink Manufacturers use a Marginal Costing System in determining the
costing of their products as well as making production and pricing choices. They have
presented you with the following cost information based on their Quarter Two projections

Cost Item Cost (US$)

Factory Labour 0.50 per unit

Variable Factory overheads 3.00 per unit

Direct Materials 1.50 per unit

Administration Salaries 20,000

Indirect Factory Overheads 50,000

The company specialises in manufacturing 5litre bottled drinks only and each bottle is sold
at US$7.00.
REQUIRED

a. Using appropriate calculations, explain to them what will happen if the company
decides to set their manufacturing at the following levels;

20,000 units (4 marks)


i.

65,000 units (4 marks)


ii.

35,000 units (4 marks)


iii.

b. You have just discovered that the quarterly demand for the drinks will be a maximum
of 50,000 units. However, the fixed costs willhave to rise to US$160,000 in order to
meet this demand. In the meantime the variable costs will remain at the same level
but the selling price can rise to US$8.00 per unit. Using appropriate calculations and
justifications, explain what course of action you would take under these
circumstances. (13 marks)

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INDIVIDUAL ASSIGNMENT – MANAGERIAL ACCOUNTING

Question 1 (a)

Variable Cost = $0.50+$3+$1.50


= $5 / unit
Fixed Cost = $20,000+$50,000
= $70,000
Selling Price = $7/unit

Break even point = Fixed Cost

Contribution per unit

= 70,000

7-5

= 35,000 units

Solutions:

i. At 20,000 units, Makuti Bottled Drink Manufacturers is operating below the Break
even point and thus will be making a loss i.e. it is operating at 15,000units less than
the Break even quantity of 35,000 units. Multiplying this shortfall by the
contribution margin($7-$5 of $2 will imply that the company will be making a Net
loss of (-15,000x2) $30,000.

This can be represented on a Marginal costing Income statement below:

Makuti Bottled Drink Manufacturers’ Income Statement(@20,000 units)

Sales Revenue 20,000 x $7 $140,000


Less Product cost:
Factory labour $.50 x 20,000 ($10,000)
Variable factory overheads $3 x 20,000 ($60,000)
Direct materials $1.50 x 20,000 ($30,000)
Contribution Margin $40,000
Less Period Cost:
Administrative salaries ($20,000)
Indirect factory overheads ($50,000)
Net Profit ($30,000)

This loss making scenario is not recommended.

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INDIVIDUAL ASSIGNMENT – MANAGERIAL ACCOUNTING

ii. At 65,000 units, Makuti Bottled Drink Manufacturers will be operating above the
Break even point and thus will be making a profit i.e. it is operating at 30,000units
above the Break even quantity of 35,000 units. Multiplying this excess quantity by
the contribution margin of $2 will imply that the company will be making a Net
Profit of (+30,000x2) $60,000.

This can also be represented on a Marginal costing Income statement below:

Makuti Bottled Drink Manufacturers’ Income Statement(@65,000 units)

Sales Revenue 65,000 x $7 $455,000


Less Product cost:
Factory labour $.50 x 65,000 ($32,500)
Variable factory overheads $3 x 65,000 ($195,000)
Direct materials $1.50 x 65,000 ($97,500)
Contribution Margin $130,000
Less Period Cost:
Administrative salaries ($20,000)
Indirect factory overheads ($50,000)
Net Profit $60,000

This scenario is recommended.

iii. At 35,000 units, Makuti Bottled Drink Manufacturers is operating at the Break even
point and thus will neither be making a profit nor a loss. This is the point where
total costs are at par with Total Revenue.

Break even point = Fixed Cost

Contribution per unit

= 70,000

7-5

= 35,000 units

This can still be represented on a Marginal costing Income statement as below:

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INDIVIDUAL ASSIGNMENT – MANAGERIAL ACCOUNTING

Makuti Bottled Drink Manufacturers’ Income Statement(@35,000 units)

Sales Revenue 35,000 x $7 $245,000


Less Product cost:
Factory labour $.50 x 35,000 ($17,500)
Variable factory overheads $3 x 35,000 ($105,000)
Direct materials $1.50 x 35,000 ($52,500)
Contribution Margin $70,000
Less Period Cost:
Administrative salaries ($20,000)
Indirect factory overheads ($50,000)
Net Profit $0.00

At break –even point, operations can only be feasibly continued for the sake of
maintaining the brand on market, otherwise it is not viable for business growth.

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INDIVIDUAL ASSIGNMENT – MANAGERIAL ACCOUNTING

b) New scenario, where;

Variable Cost = $5 / unit

Fixed Cost = $160,000

Selling Price = $8/unit

Maximum Demand = 50,000 units

Break even point = Fixed Cost

Contribution per unit

= 160,000

8-5

= 53,333.33 units (i.e. above maximum demand)

Under the given circumstances, the Break even point is 3,333 units above the demand of 50,000
units. If the company operates at 50,000 units, it will be making a loss of (-3,333 x $3) $10,000.
Company cannot manage to continue production when it is making such a loss, and yet still
cannot produce at and/or more than the Break even quantity because any extra units above
maximum demand will not sell in the market. Therefore, it is only feasible to discontinue
production. Any prospects of continuing in business can only be hinged on the company’s
ability to improve on its contribution margin either through cost savings or repricing of its
product so as to establish an ideal break even point.

If Makuti Bottled Drink Manufacturers has to break even at 50,000 units, it should revise its
pricing and variable cost structure(without impairing on product quality). The Company can
increase the selling price or reduce variable costs per unit by $.20. This will mean that the new
contribution per unit will be to $3, and the break even point will adjust as follows;

Variable Cost = $5 / unit(unchanged)

Fixed Cost = $160,000

Selling Price = $8.20/unit(reviewed upwards to break even)

Maximum Demand = 50,000 units

Break even point = Fixed Cost

Contribution per unit

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INDIVIDUAL ASSIGNMENT – MANAGERIAL ACCOUNTING

= 160,000

$8.20 - $5

= 50,000 units (i.e. at par with maximum demand)

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