Chapter 3 and 8 Revision Notes

Chapter 3 and 8 - Revision
SEMESTER 1, 2015/2016, TEST 1

SECTION A: True/False Questions
1. Period costs are costs that are matched against revenues on a time period
basis. T
2. Fixed cost per unit varies with changes in volume of output. T
3. Total cost refers to activity cost per unit basis. F
Section B: Multiple Choice questions
1. After graduating from secondary school, Siew Chin had three choices, listed in
order of preference: (1) attend matriculation , (2) work in a printed circuit
board factory, or (3) do diploma at a college. Her opportunity cost of going to
matriculation includes which of the following?
A. the income she could have earned at the printed circuit board factory plus
the direct cost of attending matriculation (tuition, textbooks, etc.)
B. the income she could have earned at the printed circuit board factory plus
the benefits of attending college for diploma
C. the benefits she could have received from going to the college to
do diploma
D. cannot be determined from the given information
Question 2
a) A company manufactures and retails clothing. In the right-hand column, write
what type of expense each item is. These can be analysed as to whether they
are
direct materials (DM),
direct labour (DL),
manufacturing overhead (MOH),
administration expenses (AE),
selling and distribution expenses (S&D),
1)
2)
3)
4)
5)
6)
7)
Cost
Lubricants for sewing machines
Interest on bank overdraft
Woven silk
Wages of security guards for factory
Cost of advertising products on television
Wages of operators in the pattern & cut department
Wages of forklift truck drivers who handle raw
materials
Cost analysis
MOH
AE
DM
MOH
S&D
DL
MOH

b) Siti Moon has a catering business. One day she has to decide whether to
accept Lizas or Fazlis order, as she could not take both order at the same
time.
If she accepts Lizas, she has to incur total cost of RM 3,000, and get net
income of RM1,500.
If she accepts Fazlis, she has to incur total cost of RM 4,500, and get net
income of RM1,000.
If she declines both orders, she still has to incur RM500 on the cook fixed
salary (this was included in both orders total costs)
i.
What is Siti Moons opportunity costs if she accepts Lizas order?

Net income of RM1,000 from Fazlis order_
ii.
How much of the cost that should be considered as sunk cost if Siti accept
Lizas order?
Cooks fixed salary of RM500
SEMESTER 2, 2015/2016, TEST 2

4. Money has a time value whereby as an individuals earning grows, his/her
purchasing power also increases as time goes by. F
5. Under the simple interest scheme, you earn interest only on the principal
amount at the end of each interest period but for the compounding interest
scheme, you earn interest on the principal as well as interest on interest. T
6. The single payment present worth factor is designated as ( F/P, i ,N ) used in
the calculation to find the present worth of a future sum. F
7. The cash flow pattern of a linear gradient series produces an ascending or
descending line by a fixed amount. T
Section B: Multiple Choice questions
8. Contribution margin
A. is the difference between selling price per unit and total variable cost
B. is the total of fixed cost per unit and profit per unit
C. is the contribution that each unit makes towards absorbing variable costs
and showing a profit
D. is the firms profit at the break-even point
9. Economic equivalence
A. refers to a cash flow either for a single payment or a series of
payment that can be converted to an equivalent cash flow at any
point in time.
B. exists between cash flows that have the same economic effect but however
cannot be traded in the financial market place
C. refers to the fact that additional risk is not taken without additional return
by investors
2

D. is the concept of a nearby penny is worth a distant dollar
10. To increase a given future value, the discount rate should be adjusted
__________.
A.
upward
B.
downward
C.
first upward and then downward
D.
None of the above answers are correct; you should use PVIF.
A.
11. Mr Rahman recently bought TNB share at RM12.00 and will sell it when the
share price has doubled. If the share price of TNB is expected to increase 15%
per year, how long will he wait before selling the TNB shares?
1.8 years
B. 4.8 years
C. 6.0 years
D. 10.8 years
Section C
Question 1 (10 marks)
Information below has been gathered for Jooel Boonger Sdn Bhd.
Selling Price per unit
RM17
Fixed Expenses
Selling & Administrative
RM130,000
Interest Expense
Variable Expenses per unit
Cost of Goods Sold (COGS)
Selling & Administrative
RM10,000
RM4
RM3
REQUIRED:
i. What is the companys contribution margin?
CM = (Selling price VC) = 17 (4+3) = 10
ii. What is the break-even point in units?
Break even quantity
= (Fixed Cost)/ (CM)
/10 = 14,000 units
= [(130,000 + 10,000) + 0]
iii. If the company wants to earn a profit of RM42,000 instead of breaking

even, what is the number of units the company must sell?
Quantity = (Fixed Cost + Profit)/ (CM) = (140,000) + 42,000) / 10 = 18,200
units
iv. The companys supplier increases his prices. The COGS per unit increases
to RM5.50. The business is not able to pass on the price increase to

customers. By how much must fixed costs fall in order for the business to
breakeven? (4)
Break even quantity
= (Fixed Cost)/ (CM)
14,000
= FC / (17 (5.50+3)) ; FC = 119,000
.: FC must be reduced by RM21,000 (140k-119k) for the co. to breakeven.
OR 15% reduction
Question 2 = 14 marks
i) Johana has deposited RM33,000 today once in an account which will earn 10
percent annually. She plans to leave the funds in this account for seven years
earning interest. If the goal of this deposit is to cover a future obligation of
RM65,000, what recommendation would you make to Johana?
Prove the sufficiency of the deposit
= 33,000(F/P,10%,7yr) = 33,000 x (1+0.1)7 = 33,000 x 1.9487 =
64,307.10
Thus 64,307.10 < 65,000 , not sufficient
Recommendation (either 1)
- increase amount of deposit, OR
- choose other plan with higher interest earning, OR
- leave the fund for longer than 7 years
ii) A company expects to pay RM20,000 per year for a contracted cleaning
service starting at the end of next year and continuing for a total of 5
payments. Construct the cash flow diagram to find the present worth of
the payments at an interest rate of 8% per year.
Answer: P is to be determined in year 0.
P=?
iii) For the cash flows shown below, calculate the future worth in year 8 using
i = 10%
Year
0
1
Cash flow,RM per year 100
2
100
3
100
4
200
5
200
6
200
200

FV n=8 =100(F/A,10%,3)(F/P,10%,6) + 200(F/A,10%,4)(F/P,10%,2)
= $1666
SPECIAL SEMESTER , 2015/2016, TEST 1
4. It is better to receive money earlier than later because our purchasing power
will increase in the future. F
5. Fixed costs are zero when production is equal to zero. F
6. Steel in bridge construction is a direct raw material. T
7. Heat and light costs associated with a companys administrative function is a
nonmanufacturing costs. T
8. Fixed cost per unit varies with changes in volume. T
9. The quantity of a variable at which revenues and costs are equal is known as
the maximum cost point. F
10.
The type of cost given below is a variable cost. T

Volume
Cost
1 unit
RM 18
10 units
180
100 units
1800
QUESTION 2 [13 marks]

QChair manufacturing company produces ergonomic small office chair that can
contribute to increased productivity , improved health and safety, increased job
satisfaction and
decreased injuries and workers compensation claim in
companies.
Financial data of the manufacturing process is as in the table below.
ITEM
RM
Direct Materials Per Unit
30
Direct Labor Per Unit
10
Variable Manufacturing Overhead Per Unit
10
Variable Marketing and Administrative

ExpensesPer Unit
10
Fixed Manufacturing Overhead
500,000
Fixed Marketing and Administrative Expenses
300,000
Selling Price Per Unit
160

(a)Calculate the contribution margin and interpret your answer.
CM = Price Avg. Variable Cost
= 160 (30+10+10+10) = RM100 To cover for AFC and profit per
unit.
(b)What is the break-even sales?
BE (Sales) = [Fixed cost / CM per unit] x SP/unit = [800,000 / (160
60)]*160
(c) Calculate the total non manufacturing cost per unit at the break-even point.
(300,000 /8,000) + 10 = 37.5 + 10 = RM47.50
(d) i. Do you agree that the quantity manufactured and sold should increase
by 25% to make a profit of RM200,000 compared to the break even
point? Show your calculations.
(FC + PROFIT)/ MC
(800,000 + 200,000)/ 100 = 10,000 units
10,000 units -8,000 units= 2,000 units]; an increase of 2,000/8,000 = yes,
25%
Or
160Q (800,000+60Q)= 200,000; Thus Q = 10,000 units
From part (b), break-even units are 8,000
10,000 units - 8,000 units= 2,000 units; an increase of 2,000/8,000 = yes,
25%
ii. What is the profit per unit at RM200, 000 profit?
200,000 / 10,000 = RM20
(e)Due to the shortage of supply of materials used to make the seat pan, the
cost of direct material per unit increases by RM5, all else remain constant.
What will be the effect on quantity to maintain a profit of RM200, 000?
160Q (800,000 + 65Q) = RM200,000; Q = 1,000,000 / 95 = 10526 units;
an increase of 526 units to produce and sell.
SPECIAL SEMESTER , 2015/2016, TEST 2

1. Economic equivalence exists when
A. cash flows have the same economic effect and could be traded for
one another in the financial marketplace
B. cash flows have the same economic effect but could not be traded for one
another in the financial marketplace
C. cash flows have different economic effect but could be traded for one
D. cash flows have different economic effect and could not be traded for one
2.
The process of finding the future value is often called _______________
process.
A.
compounding
B.
disbursement
C.
discounting
D.
receipt
3.
Which of the following indicates a series of payments of a fixed amount for

a specified number of periods?
A.
Annuity
B.
Future Value
C.
Present Value
D.
Principal Amount
Question 4: [2 marks]
a. A person deposits RM10,000 into a money market account which pays interest
at a rate of 8% per year. Calculate the amount that would be in the account at
the end of ten years.
F= 10,000(F/P,8%,10) = 10,000 (2.1589)= RM21589
Question 5
A piece of machinery has a first cost of RM50,000 with a monthly operating cost
of RM10,000.
Calculate the monthly income if the company wants to recover its investment in
five years at an interest rate of 1% per month.
ANSWER
First cost:
A= 50,000(A/P,1%,60) [1 mark] = 50,000(0.0222) = RM1110
Monthly cost= RM1110 + RM10,000 = RM11,110
Income must be RM11,110
7
COEB 442, Semester 1, 2015/2016

(a) A company has a fixed costs of RM20,000 per month, the variable cost for its
product is RM 400 per piece and break even quantity per month is 50 pieces.
(i) Calculate the price charged to break even.
(ii) Calculate the profit if 250 pieces were sold in the market.
(iii)
The company has a goal of RM100,000 profit next year. Determine
the change (in RM) in variable cost (assuming fixed cost and price remain
the same) necessary to meet this goal if the number of units sold is the
same i.e. 250 pieces.
(b)What would be the effect on the break even quantity if the fixed costs were
decreased by 10% and the variable cost per piece were increased by 10%
simultaneously?
i.
20,000/(P-400 ) = 50; P = RM800
ii.
250(800) [20,000 +400 (250)] = 200,000 120,000 = RM80,000
iii.
250(800) [20,000+V (250)] = 200,000 20,000-250V = RM100,000

V = 80,000/250 = RM320
Change in VC (decrease) = RM400-RM320 = RM80
b. FC reduced by 10% = RM18,000

VC increased by 10% = RM440
18,000/(800-440) = 50 pieces; No change occurred in the original break
even point.
COEB 442, Semester 1, 2015/2016

(a)
Upin and Ipin are twins. Upin is planning for his retirement 19 years from
now. He plans to invest RM5,800 per year for the first 8 years and RM8,300 per
year for the following 11 years (assume all cash flows occur at the end of each
year). If both Upin and Ipin can invest in saving account with 9% interest rate,
how much Ipin has to deposit each year in equal amount into his account so
that after 19 years, the total amount in his account is the same as his brother
Upin? (Note: all cash flows occur at the end of the year).
FV n=19 = [5800 (F/A, 9%, 8) (F/P, 9%, 11) + 8300 (F/A, 9%, 11)] =
310806.55
A = 310806.55 (A/F, 9%, 19) = 6744.50
8

Or
FV n=19 = [5800 (P/A, 9%, 8) + 8300 (P/A, 9%, 11) (P/F, 9%, 8)] =
60450.73
A = 60450.73 (A/P, 9%, 19) = 6752.34
(b)
Ali just purchased a brand new machine worth RM40,000. He estimates

that the maintenance cost for the machine during the first year will be
RM2,800. The maintenance cost is expected to increase by RM800 per year
throughout its seven years useful life. Ali wants to set up an account and
all future maintenance expenses will be paid out of this account. Assuming
the maintenance cost occur at the end of year, how much does Ali has to
deposit in the account now at 10% interest rate?
P = A (P/A, 10%, 7) + G (P/G, 10% 7) = 2,800 (4.8684) + 800 (12.7631)
= 23,842

Rinching Furniture Sdn Bhd operates a factory at the Beranang Industrial Zone
that manufacture ergonomic rattan chair. The data given below are for costs in
year 2014 for producing 3,000 units of the rattan chairs. Currently, each rattan
chair is been sold at RM120.
Units Produced
Direct labor
Direct raw materials
Manufacturing overhead:
Variable portion
Fixed portion
Selling and administrative costs:
Variable portion
Fixed portion
Costs (RM)
90,000
60,000
------------54,000
24,000
30,000
(a) Given that the manufacturing cost per unit is RM80, calculate the variable
portion value of the manufacturing overhead costs in year 2014. [Hint: Fill
in the missing value in the table]
Total manufacturing costs = RM80 x 3,000 = RM240,000
Variable Manuf. Overhead = RM240k -90k-60k-54k = RM36,000
(b) Using the answer that you have calculated in part (a), compute the
following:
i. Total variable costs
90k +60k +36k +24k = RM210,000
ii. Total variable costs per unit
210k /3,000 units = RM70

9
iii. Total costs
90k+60k+36k+54k+24k +30k = RM294,000
(c) Based on the current selling price set by the company, answer the
following:
i. What is the companys profit per unit for the sale of 3,000 units of
rattan chairs?
Profit = TR TC; = (RM120 x 3,000 units) 294k = RM66,000 /
3,000 = RM22
ii. Calculate the contribution margin per unit of the rattan chair when
sales are at 3,000 units. Interpret the meaning of your answer.
Contribution margin /unit = P AVC = RM120 RM70 = RM50
The contribution that each unit makes toward absorbing (i) fixed costs and
(ii) showing a profit.
iii. Prove that the profit per unit plus the average fixed costs is equal to the
contribution margin value as calculated in part c(ii).
Contribution margin = Profit per unit + AFC = RM22k + 84k / 3k
RM50
iv. Determine the break-even volume and sales.
TR= TC; P x Q= FC +( AVC x Q); 120Q = 84,000+ 70Q ; Q = 1680
COEB 442, Semester 2, 2014/2015
The following are the data for LightSys Software Corporation per month.
Units Sold
Total Variable Costs
Contribution Margin Per unit
Profit
40,000 units of pendrives

RM560, 000
RM6
RM70, 000
(a) What is the price per unit of the pendrive?

Avg Variable Cost = 560,000/40,000 = RM14
CM = Price AVC; Thus P= RM6 + RM14 = RM20
(b)How much sales can the company generate?
RM20 x 40,000 [1 m] = RM800, 000
(c) Do you agree that the average fixed cost is RM1.75? Calculate to answer.
20(40,000) (560,000 + FC)= RM70,000
AFC = RM170, 000 / 40,000 = RM 4.25; NO
10
(d) How many units of pendrive must LightSys sell in order to break even?
(round to the nearest whole unit)
20Q = 170,000 + 14Q; Q = 170,000/6 = 28334 units; thus Sales: 28334 x
RM20 = RM566680
(e) Given the variable production cost per unit increases by RM 2, but no
change in fixed costs, can the company maintain the same level of profit
if it sells 50,000 units of pendrive per month? Calculate to answer.
TR = RM20(50000) = RM1,000,000
TC= RM16(50000) + RM170000 = RM970000
PROFIT: RM30,000
NO; A DECLINE IN PROFIT OF RM70000-RM30000 = RM40000
11

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Chapter 3 and 8 - Revision

SEMESTER 1, 2015/2016, TEST 1