Mock exam question

I haven’t seen this method used before (what you have put above):

The budget contribution is (7000 x 30% x 30) + (3000 x 30% x 40) = 99,000.
This is for total sales of 10,000 units.

The actual total sales are 8000 + 7000 = 15,000 units (i.e. 5,000 more in total)

So the sales quantity variance = 5,000/10,000 x 99,000 = $49,500 (favourable)

This is how I set out my answer:

Sales Quantity Variance

SMSQ std contrib Total SMAQ std contrib Total Variance
X 7000 x $9 63000 7/10 10500 x $9 94500 31500(F)
Y 3000 x $12 36000 3/10 4500 x $12 54000 18000(F)
10000 99000 15000 148500 49500(F)

SMSQ – Standard mix at standard quantity
SMAQ – Standard mix at actual quantity

Does this look ok?

Thanks

Chloe

For Marcie’s question is the answer 400 units as making all of X uses 500 hrs which leaves you with 100 hrs left. If you divide this by the time needed per unit:

100 hrs/0.25 hrs = 400 units

Thanks, I am still trying to remember all of the variances.

@johnmoffat said:

2. If they only make X then the fixed overheads will be 144,000 – 6,000 = 138,000.

Dear John,

Could you explain please why fixed OH is 144.000?
Thank you

How to solve this?

1) A division is considering a capital investment $6.5m. The expected life of the investment is expected to be 40 years, with no resale value at the end of the period. The forecast return on investment 20% per annum before depreciation. The division cost of capital is 10%. What is the expected annual residual income of the initial investment?

2) At the start of the year, a division has non-current assets of $6M and makes no addition or disposals during the year. Depreciation is charged at 10% per annum on all non-current assets. Working capital is $0.75m at the start of the year and is expected to increase by 20% by the end of years. The budgeted profit of the division after depreciation is $1.8m. What is the expected ROI of the division for the year, based on average capital employed?

Hello Mr John,
In you answer to Marcie157

2. If they only make X then the fixed overheads will be 144,000 – 6,000 = 138,000.
For a profit of 144,000, then therefore need a contribution of 138,000+144,000 = 282,000.

X generates a contribution of 10.56 per unit

Therefore they need to produce 282,000/10.56 units.

I think here the answer is incorrect

because we should add the f.c back to the profit

144000+(2.88×10000+2.4×12500)-6000=196799.999

then dividing by contribution /unit of x 10.56 we get 18636.36 units

can you confirm this one ,

Thanks for help,

@johnmoffat said:
Sorry – I must have been answering too fast because I made a mistake.

At the moment, the total fixed overheads = (10,000 x 2.88) + (12,500 x 2.40) = 58,800
If they only make X then the fixed overheads will be 58,800 – 6,000 = 52,800.
For a profit of 144,000, then therefore need a contribution of 52,800+144,000 = 196,800.

X generates a contribution of 10.56 per unit

Therefore they need to produce 196,800/10.56 units = 18,636 units (which is the correct answer 🙂 )

Sorry about that.

Thank you John, it is ok.
I thought I missed something.