[nnaemeka]

helpful.
https://en.wikipedia.org/wiki/Materiality_%28auditing%29

[nnaemeka]

the journal entries for allowance for doubtful debts are thus: where x are the amounts and cu the currency unit
allowance for doubtful debts expense CUx
allowance for doubtful debts CUx
You can see that the expense affects the Income statement entry while the allowance for doubtful debts entry is a contra against receivables which reflects in the balance sheet.
therefore, since profits = revenue – expenses, overstating expenses understates profits.
therefore, profits are understated by the increment. Hence, profits are understated by 8000.
allowance on receivables is a BS item and is a credit on the Receivable (debtor) itself, therefore, the increment understates an asset item in the BS by 8000.

[nnaemeka]

Also, at the overtime premium for general overtime, from where the 0.5 it’s coming?

The 0.5 is overhead component of overtime. 100% or 1 is attributed to direct labor and the remaining to indirect labor or manufacturing overhead.

Now for the questions:
a) Total direct labor costs.
The direct labor costs can only be attributed to skilled workers. So, in calculating the total direct labor costs we calculate the regular pay and then the component of overtime that is attributed to direct labor.
Regular pay:
Hours per week = 35 hrs
Rate = $10/hr
No of workers = 7
Direct labor cost from regular pay per week = 35 hrs * $10/hr * 7 = $2450
Overtime pay:
Hours overtime = 50 hours {note: the question does not call for allocating overtime between specific orders or general processes. note!}
overtime rate = 150% of regular pay
Rate attributed to direct labor = 100% or 1
Therefore, overtime pay that is in direct labor costs = 1 * 50 hrs * $10/hr * 7 = $3500
Total direct labor cost = DL in regular pay + DL in overtime pay = $2450 + $3500 = $5950

b) Total indirect labor costs is equivalent to manufacturing overhead from labor. note!
total indirect labor costs attributed to skilled workers from overtime pay plus the total compensation of semi-skilled workers because semi-skilled workers are indirect labor.
Indirect labor from skilled workers:
Overtime rate allocated to manufacturing overhead = 50% of regular pay = 1/2 * 50 hrs (of overtime) * $10 * 7 = $1750
indirect labor from semi-skilled workers:
Regular compensation, semi-skilled workers = 35 hrs * $7.5 * 4 workers = $1050
Overtime compensation = 150% of regular pay = 1.5 * 20 hrs * $7.5 * 4 = $900
Total compensation, semi-skilled workers = $1050 + $900 = $1950

Total indirect labor costs = $1750 + $1950 = $3700
I am sure some of your earlier confusion are now clarified.

[nnaemeka]

<cite> @nnaemeka said:</cite>
now for BII: (ii) the sales volume at which the owners of the restaurant would earn no additional profit (or break-even point) from the proposed diversification.(3 marks)
We’ll use the sales mix between the two meals, take-away and regular to calculate the break-even point.
Sales volume, take-away = 720 meals
Sales volume, regular = 772 meals.
Therefore, the sales mix in meals is: 48% of take-away meals to 52% of regular meals.

Downwards from here is wrong in my earlier reply. I realized it this afternoon while reflecting on the huge operating leverage that was calculated, so i came to review it. Just follow up from above and make adjustments from here.
unit price, take-away meal = $1.6
Unit variable cost, take-away meal = $0.85
unit contribution margin = $1.6 – $0.85 = $0.75 {I failed to calculate this but used the price for UCM}
Unit price, regular = $4
Unit Variable cost, regular meal = $2.8
Unit contribution margin, regular meal = $1.2 {I failed to calculate this but used the price for UCM}
Since we have two distinct meals here, we will use weighted-average unit contribution margins.
weighted-average unit contribution margins = ($0.75 * 48%) + ($1.2 * 52%) = $0.36 + $0.624 = $0.984
Fixed costs = fixed costs for regular meals + fixed costs for take-away meals (or incremental fixed costs) = $800 + $610 = $1410
Break-even point = fixed costs / weighted-average unit contribution margin = $1410/$0.984 = 1432.93 meals per week.
This number of meals is allocated between take-away and regular meals according to their sales mix.
Break-even point, take-away meals = 48% of 1432.93 = 688 meals per week.
Break-even point, regular meals = 52% of 1432.93 = 745 meals per week

Let us verify the break-even point calculation through an income statement
Sales revenue:
Take-away meals = 688 * $1.6 = $1100.8
Regular meals = 745 * $4 = $2980
Total revenue = $1100.8 + $2980 = $4080.8
variable costs = ($2.8 * 745){regular} + ($0.85 * 688) {estimated take-away} = 2086 + 584.8 = $2670.8 {understand the logic? The variable costs on the break-even quantity!}
Contribution margin = $4080.8 – $2670.8 = $1410
Profit = contribution margin – fixed costs = $1410 – $1410 = $0 {proved}
Contribution margin =

[nnaemeka]

now for BII: (ii) the sales volume at which the owners of the restaurant would earn no additional profit (or break-even point) from the proposed diversification.(3 marks)
We’ll use the sales mix between the two meals, take-away and regular to calculate the break-even point.
Sales volume, take-away = 720 meals
Sales volume, regular = 772 meals.
Therefore, the sales mix in meals is: 48% of take-away meals to 52% of regular meals.
unit price, take-away meal = $1.6
Unit price, regular = $4
Since we have two distinct meals here, we will use weighted-average unit contribution margins.
weighted-average unit contribution margins = ($1.6 * 720) + ($4 * 772) = $5.968 = $5.97
Fixed costs = fixed costs for regular meals + fixed costs for take-away meals (or incremental fixed costs) = $800 + $610 = $1410
Break-even point = fixed costs / weighted-average unit contribution margin = $1410/$5.968 = 236.26 meals per week.
This number of meals is allocated between take-away and regular meals according to their sales mix.
Break-even point, take-away meals = 48% of 236.26 = 113.4 meals = 113 meals per week.
Break-even point, regular meals = 52% of 236.26 = 122.86 meals = 123 meals.

Point to note: Using economies of scale, the restaurant could achieve its aim of $300 per week by diversifying into take-away meals, this at a lower cost, and since regular meals are highly priced, known and more expensive, in totality, there is a possibility that the increase in revenue would be much more than anticipated.

[nnaemeka]

To understand B, you have to realize that whatever option is chosen, the restaurant’s owners are venturing into a different area of operations that is separate and distinct from the Regular operations.
BI: (i) the additional profit that would be earned by the owners of the restaurant if the estimated sales were achieved(8 marks).
Let’s draw up a contribution income statement under the assumption that take-away option was chosen.
First, a contribution income statement for the Regular operations net Take-away foods operations.
Assumption: For every 10 take away meals sold, 1 more Regular meal will be sold.
720 take-away meals were estimated, therefore, the increase in regular meals = 72
Total sales, Regular meals = 700 (before diversification; see above) + 72 (increase in sales) = 772 meals per week.
Unit price of Regular meals = $4
Total revenue from regular meals = unit price * sales volume = $4 * 772 = $3088
Variable costs:
Materials: under the planned diversification, it was estimated that due to bulk buying material costs would be reduced by $0.1 for every meal. Therefore, material costs will reduce by $77.2 ($0.1 * 772 meals). Total material costs = $1540 – $77.2 = $1462.8
Total variable costs = $1462.8 (material costs) + $280 (Power) = $1742.8
Contribution margin = Revenue – Total variable costs = $3088 – $1742.8 = $1345.2
Fixed costs:
Staff: staff costs are now fixed costs= $340
Total fixed costs = $340 (staff costs) + $460 (Building occupancy costs) = $800
Profit = Contribution margin – total fixed costs = $1345.2 – $800 = $545.2
Regular profits = $545.2

The operations for take-away foods is a different arm in the restaurant. Therefore, we calculate the profit from that operation using the estimates given.
Estimated Revenue = estimated sales volume * estimated unit price = 720 * $1.6 = $1152
Estimated variable cost = estimated sales volume * unit variable costs = 720 * $0.85 = $612
Estimated contribution margin = Estimated revenue – estimated variable costs = $1152 – $612 = $540
Estimated Fixed costs = incremental fixed costs = $610
Profit (loss) = Estimated contribution margin – estimated fixed costs = $540 – $610 = ($70)
You can see that the take-away arm runs at a loss. But the restaurant has net positive gain by diversifying:
Gain (loss) from diversification into take-away meals = Revenue from regular meals + revenue from diversification = $545.2 + ($70) = $475.2 gain under diversification.
Now, what is the additional profit? This is the profit per week after diversification less the profit per week before diversification.
Profit per week after diversification = $475.2
Profit per week before diversification = $180 (see above)
Additional profit = $475.2 – $180 = $295.2 (164% increase in profits per week)
follow the same steps in calculating the additional profit from diversification under quality meals

[nnaemeka]

This is for the portion of the question that involves: Calculate the number of meals that must be sold in order to earn a profit of $300 per week.(4 marks).
Answer:
a. no of meals that must be sold to earn $300 per week.
Total variable costs: $1540 (Materials) + $280 (Power) + $140 (variable component of staff costs) = $1960
Total fixed costs: $200 (fixed component of staff costs) + $460 (Building occupancy costs) = $660
Total Revenue: $2800
Profit per week: $180
Contribution margin: $840 ($2800 – $1960)
Unit selling price per meal: $4
Total revenue = Unit selling price x no. of units of meals sold per week
d/4, $2800 = $4 * x
x = $2800/$4 = 700 meals sold per week.
Unit variable cost = Total variable cost/no of meals sold per week = $1960/700 = $2.8
Unit contribution margin = unit selling price – unit variable cost = $4 – $2.8 = $1.2
Targeted net profit: $300
To calculate no. of meals per week for the restaurant to reach its target, using CVP:
(Fixed expenses + target net profit)/unit contribution margin = target no of meals per week for $300 revenue to be reached.
($660 + $300)/$1.2 = 800 meals per week for target profit of $300

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