Ethiopian Civil Service University Department

of Public Financial Management and

Accounting
Advanced Cost and Management Accounting
Assignment
General instruction: Attempt all of the following questions and submit your answer for even
number questions individually and odd numbers in a group.
Deadline for all assignments is May 23, 2023.

Question 1:
(a) From the following information you are required to construct:
(i) a break-even chart, showing the break-even point and the margin of safety;
(ii) a chart displaying the contribution level and the profit level;
(iii) a profit–volume chart.
Sales 6000 units at Br.12 per unit = Br.72 000
Variable costs 6000 units at Br.7 per unit = Br.42 000
Fixed costs = Br.20
000
(b) State the purposes of each of the three charts in (a) above.
(c) Outline the limitations of break-even analysis.
(d) What are the advantages of graphical presentation of financial data to executives?

Question 2:
A company produces and sells two products with the following costs:
Product X Product Y
Variable costs per Br. of sales Br.0.45 Br.0.6
Fixed costs per period Br.1 212 000 Br.1 212
000
Total sales revenue is currently generated by the two products in the following
proportions: Product X 70%
Product Y 30%
Required:
(a) Calculate the break-even sales revenue per period, based on the sales mix assumed above.
(b) Prepare a profit–volume chart of the above situation for sales revenue up to Br.4 000 000.
Show on the same chart the effect of a change in the sales mix to product X 50%, product
Y 50%. Clearly indicate on the chart the break-even point for each situation.
(c) Of the fixed costs Br.455 000 are attributable to product X. Calculate the sales revenue
required on product X in order to recover the attributable fixed costs and provide a net
contribution of Br.700 000 towards general fixed costs and profit.
Question 3:
Keppel Manufacturing had a bad year in 2012, operating at a loss for the first time in its history.
The company’s income statement showed the following results from selling 200,000 units of
product: net sales Br.2,000,000; total costs and expenses Br.2,120,000; and net loss Br.120,000.
Costs and expenses consisted of the following.
Total Variable Fixed
Cost of goods sold Br.1,295,000 Br. 975,000 Br.320,000
Selling expenses 575,000 325,000 250,000
Administrative expenses 250,000 100,000 150,000
Br.2,120,000 Br.1,400,000 Br.720,000
Management is considering the following independent alternatives for 2013.
1. Increase unit selling price 30% with no change in costs and expenses.
2. Change the compensation of salespersons from fixed annual salaries totaling
Br.170,000 to total salaries of Br.50,000 plus a 6% commission on net sales.

Instructions
(a) Compute the break-even point in dollars for 2012.
(b) Compute the break-even point in dollars under each of the alternative courses of
action. Which course of action do you recommend? (Round to the nearest dollar.)

Question 4:
McCune Corporation has collected the following information after its first year of sales. Net
sales were Br.1,000,000 on 50,000 units; selling expenses Br.200,000 (30% variable and 70%
fixed); direct materials Br.300,000; direct labor Br.170,000; administrative expenses Br.250,000
(30% variable and 70% fixed); manufacturing overhead Br.240,000 (20% variable and 80%
fixed). Top management has asked you to do a CVP analysis so that it can make plans for the
coming year. It has projected that unit sales will increase by 20% next year.
Instructions
(a) Compute (1) the contribution margin for the current year and the projected year, and (2)
the fixed costs for the current year. (Assume that fixed costs will remain the same in the
projected year.)
(b) Compute the break-even point in units and sales dollars for the current year.
(c) The company has a target net income of Br.187,000. What is the required sales in dollars
for the company to meet its target?
(d) If the company meets its target net income number, by what percentage could its sales
fall before it is operating at a loss? That is, what is its margin of safety ratio?
 (e) The company is considering a purchase of equipment that would reduce its direct labor
costs by Br.70,000 and would change its manufacturing overhead costs to 10% variable
and 90% fixed (assume total manufacturing overhead cost is Br.240,000, as above).
Question 5:
Lorge Corporation manufactures and sells three different models of exterior doors. Although the
doors vary in terms of quality and features, all are good sellers. Lorge is currently operating at
full capacity with limited machine time.

Sales and production information relevant to each model is shown below.

Product
Economy Standard Deluxe
Selling price Br.270 Br.450 Br.650
Variable costs and expenses Br.150 Br.261 Br.425
Machine hours required 0.6 0.9 1.2
Instructions
(a) Ignoring the machine time constraint, which single product should Lorge produce?
(b) What is the contribution margin per unit of limited resource for each product?
(c) If additional machine time could be obtained, how should the additional time be used?
Question 6:
The Cubbie Inn is a restaurant in DeKalb, Illinois. It specializes in deluxe sandwiches in a
moderate price range. Bill Michael, the manager of Cubbie Inn, has determined that during the
last 2 years the sales mix and contribution margin ratio of its offerings are as follows.
Percent of Contribution
Total Sales Margin Ratio
Appetizers 15% 60%
Main entrees 60% 25%
Desserts 10% 60%
Beverages 15% 80%
Bill is considering a variety of options to try to improve the profitability of the restaurant.
His goal is to generate a target net income of Br.120,000. The company has fixed costs of
Br.300,000 per year.
Instructions
(a) Calculate the total restaurant sales and the sales of each product line that would be
 necessary to achieve the desired target net income.
(a) Bill believes the restaurant could greatly improve its profitability by reducing the
complexity and selling price of its entrees to increase the number of clients that it serves.
It would then more heavily market its appetizers and beverages. He is proposing to
reduce the contribution margin ratio on the main entrees to 10% by dropping the average
selling price. He envisions an expansion of the restaurant that would increase fixed costs
by 40%. At the same time, he is proposing to change the sales mix to the following.
Percent of Contribution
Total Sales Margin Ratio
Appetizers 25% 60%
Main entrees 40% 10%
Desserts 10% 60%
Beverages 25% 80%
(b) Compute the total restaurant sales, and the sales of each product line that would be necessary
to achieve the desired target net income.
Question 7:
The following variable costing income statements are available for American Company and
National Company.
American Company National Company
Sales Br.1,000,000 Br.1,000,000
Variable costs 500,000 150,000
Contribution margin 500,000 850,000
Fixed costs 300,000 650,000
Net income Br. 200,000 Br. 200,000
Instructions
(a) Compute the break-even point in dollars and the margin of safety ratio for each company.
(b) Compute the degree of operating leverage for each company and interpret your results.
(c) Assuming that sales revenue increases by 30%, prepare a variable costing income
statement for each company.
(d) Assuming that sales revenue decreases by 30%, prepare a variable costing income
statement for each company.

(e) Discuss how the cost structure of these two companies affects their operating leverage
and profitability.

Question 8:
Huber Beauty Corporation manufactures cosmetic products that are sold through a network of
sales agents. The agents are paid a commission of 15% of sales. The income statement for the
year ending December 31, 2012, is as follows.
HUBER BEAUTY CORPORATION
Income Statement
For the Year Ended December 31, 2012
Sales Br.117,000,000
Cost of goods sold
Variable Br.52,650,000
Fixed 12,915,000 65,565,000
Gross margin 51,435,000
Selling and marketing expenses
Commissions Br.17,550,000
Fixed costs 12,825,000 30,375,000
Operating income Br. 21,060,000
The company is considering hiring its own sales staff to replace the network of agents. It will pay
its salespeople a commission of 10% and incur additional fixed costs of Br.11.7 million.
Instructions
(a) Under the current policy of using a network of sales agents, calculate the Huber Beauty
Corporation’s break-even point in sales dollars for the year 2012.
(b) Calculate the company’s break-even point in sales dollars for the year 2012 if it hires its
own sales force to replace the network of agents.
(c) Calculate the degree of operating leverage at sales of Br.78 million if (1) Huber Beauty
uses sales agents, and (2) Huber Beauty employs its own sales staff. Describe the
advantages and disadvantages of each alternative.
(d) Calculate the estimated sales volume in sales dollars that would generate an identical net
income for the year ending December 31, 2012, regardless of whether Huber Beauty
Corporation employs its own sales staff and pays them a 10% commission as well as

incurring additional fixed costs of Br.11.7 million, or continues to use the

independent network of agents.

Question 9:
The West Division of Nieto Company reported the following data for the current year.
Sales $3,000,000
Variable costs 1,950,000
Controllable fixed costs 600,000
Average operating assets 5,000,000
Top management is unhappy with the investment center’s return on investment (ROI). It asks
the manager of the West Division to submit plans to improve ROI in the next year.
The manager believes it is feasible to consider the following independent courses of action.
1. Increase sales by $320,000 with no change in the contribution margin percentage.
2. Reduce variable costs by $100,000.
3. Reduce average operating assets by 4%.
Instructions:
(a) Compute the return on investment (ROI) for the current year.
(b) Using the ROI formula, compute the ROI under each of the proposed courses of
action. (Round to one decimal.)
Question 10:
Presented below is selected information for three regional divisions of Medina Company.
Divisions
North West South
Contribution margin $ 300,000 $ 500,000 $ 400,000
Controllable margin $ 150,000 $ 400,000 $ 225,000
Average operating assets $1,000,000 $2,000,000 $1,500,000
Minimum rate of return 13% 16% 10%
Instructions
(a) Compute the return on investment for each division.
(b) Compute the residual income for each division.
(c) Assume that each division has an investment opportunity that would provide a rate of
return of 19%.
(1) If ROI is used to measure performance, which division or divisions will probably
make the additional investment?
(2) If residual income is used to measure performance, which division or divisions will
probably make the additional investment?