MME40001 Engineering Management 2 Topic: Income Statement

Tutorial 2: Statement of Financial Performance Break-even Analysis

Cost-volume-profit Analysis Marginal Analysis

Problem 1:
Singh Enterprises, which started business on 1 January 2011, has a reporting period to 31 December and
uses the straight-line method of depreciation. On 1 January 2011 the business bought a machine for
$10,000. The machine had an expected useful life of four years and an estimated residual value of
$2,000. On 1 January 2012 the business bought another machine for $15,000. This machine had an
expected useful life of five years and an estimated residual value of $2,500. On 31 December 2013 the
business sold the first machine bought for $3,000.

Show the relevant income statement extracts and statement of financial position extracts for the
years 2011, 2012 and 2013.

Problem 2:
Fill in the values for (a) to (f) in the following table on the assumption that there were no opening
balances involved.

Relating to period At end of period

Expenses/ revenue Accruals/ deferred
Paid/ Received for period Prepaid revenues
$ $ $ $
Rent payable 10,000 (a) 1,000 -
Rates and insurance 5,000 (b) - 1,000
General expenses (c) 6,000 1,000 -
Interest payable on loan 3,000 2,500 (d) -
Salaries (e) 9,000 - 3,000
Rent receivable (f) 1,500 - 1,500

Problem 3:
Joe’s profit & loss records for the year ended 30 June 2011 have been lost. However, you are able to extract
the following balance sheet information together with the owner’s contribution and drawings for the year.

Beginning Ending
Current Assets
Cash 5,300.00 3,700.00
Account receivable 7,900.00 8,700.00
Inventory 6,400.00 7,500.00
Prepayment 800.00 600.00
Non Current Assets
Land 20,000.00 20,000.00
Building 60,000.00 68,000.00
Plant & equipment 18,000.00 16,500.00
Motor Vehicle 23,000.00 31,000.00

Abstracted from Atrill, Mclaney, Harvey, and Jenner, Accounting An Introduction, 4e, 2009. Pearson. 1
 Current Liabilities
Trade creditors 9,000.00 6,900.00
Bank overdraft 7,400.00
Accruals 1,300.00 1,500.00
Non Current Liabilities
Bank loan 40,000.00 36,000.00

Additional information: The owner withdraws cash of $ 12,000. Calculate the profit made by Joe’s
company during the year ended 30 June 2011.

Problem 4:
During year 2010, the following transaction took place in TT Ltd (continued from class exercise):

i. The owners withdrew capital in the form of cash of $20,000.

ii. Premises continued to be rented at an annual rental of $20,000. During the year, rent of $15,000 was
paid to the owner of premises.
iii. Rates on the premises were paid during the year for the period 1 April 2010 to 31 March 2011,
$1,300.
iv. A second delivery vehicle was bought on 1 January 2010 for $13,000. This is expected to be used in
the business for four years and then to be sold for $3,000.
v. Wages totaling $36,700 were paid during the year. At the end of the year, the business owed $860
of wages for the last week of the year.
vi. Electricity bills for the first three-quarters of the year were paid totaling $ 1,820. After 31 December
2010, but before the accounts had been finalized for the year, the bill for the last quarter arrived
showing a charge of $690.
vii. Inventory totaling $67,000 was bought on credit.
viii. Inventory totaling $8,000 was bought on cash.
ix. Sales on credit totaled $179,000 (cost $89,000).
x. Cash sales totaled $54,000 (cost $25,000).
xi. Receipts from trade debtors totaled $178,000
xii. Payments to trade creditors totaled $71,000.
xiii. Vehicle running expenses paid totaled $16,200.

Prepare a balance sheet as at 31 December 2010 and an income statement for the year to that date.

Problem 5:
Consider the following information to calculate depreciation over its useful life using three methods namely
straight-line depreciation, accelerated depreciation and units of production depreciation.

Cost of Machine $40,000

Estimated residual value at the end of its useful life $1,024
Estimated useful life 4 years

Unit of Unit of
Year Output Year Output
1 1000 3 3000
2 4000 4 2000

Abstracted from Atrill, Mclaney, Harvey, and Jenner, Accounting An Introduction, 4e, 2009. Pearson. 2
 Accelerated depreciation
Formula Unit of Production depreciation Formula
Output units in the period x (C-R)
n
P = (1 - R / C ) x 100 % T
Where n- estimated useful life, R- Residual value, C – Coat of machine, P – percentage of depreciation and
T – Total estimated units of production

Problem 6:
Spratley Ltd is a builders’ merchant. On 1 September the business had, as part of its inventories, 20
tonnes of sand at a cost of $18 per tonne and, therefore, at a total cost of $360. During the first week in
September, the business bought the following amounts of sand:

Tonnes Cost per tonne

$
2 September 48 20
4 September 15 24
6 September 10 25
On 7 september the business sold 60 tommes of sand to a local builder.

Calculate the cost of goods sold and the cost of the remaining inventories using the following
costing methods: (a) first in, first out (FIFO);
(b) last in, first out (LIFO)
(c) weighted average cost (AVCO)

Problem 7:
Selected operating data for three businesses are shown below with some numbers missing, fill the blank:
Sales Variable Fixed Net Income Units Contribution
expenses expenses (loss) sold margin
A $120,000 $10,000 20,000 $4
B $30,000 $15,000 $10,000 500
C 100,000 $52,000 ($12,000) 2,500

Problem 8:
Brown and Co. makes and sells a single product line. Summarized results for the past two months reveal the
followings:

May June
Sales (units of product) 500 650
Sales ($) 7500 9750
Materials 2000 2600
Labor 3000 3900
Overheads 1500 1800
Total costs 6500 8300
Operating profits 1000 1450

Abstracted from Atrill, Mclaney, Harvey, and Jenner, Accounting An Introduction, 4e, 2009. Pearson. 3
There were no price changes of any description during these two months. Deduce the break-even point (in
units) for the company.

Problem 9:
A company makes three products Alpha, Beta and Gamma, all of which requires two types of machine:
cutting machines and assembling machines. Estimates for next year include the following:

Product Product Product

Alpha Beta Gamma
Selling price ($ per unit) 25.00 30.00 18.00
Sales demand (units) 2,500 3,400 5,100
Direct material cost ($ per unit) 12.00 13.00 10.00
Variable production cost ($ per unit) 7.00 4.00 3.00
Time required on cutting machines (per unit) 1.0 hours 1.0 hours 0.5 hours
Time required on assembling machines (per unit) 0.5 hours 1.0 hours 0.5 hours

Fixed overheads for next year are expected to total $42,000. It is the company’s policy for each unit of
production to absorb the overheads in proportion to its total variable costs. The company has cutting
machine capacity of 5,000 hours per annum and assembling machine capacity of 8,000 hours per annum.

Required: a) Identify the limiting factor in terms of available machine hours

b) Determine (with supporting workings) based on the limiting factor which products in what
quantities the company should plan to make next year

Problem 10:
Khan Ltd can make three products (A, B and C) using the same machines. Various estimates for next year
have been made as follows:
Product A B C
$ $ $
Selling price 30 39 20
Variable material cost 15 18 10
Other variable production costs 6 10 5
Share of fixed overheads 8 12 4
Time per unit required on
Machine hours 2 3 1
Fixed overhead costs for next year are expected to total $40,000.
Required: (a) If the business made only product A next year, how many units would it need to make to
break even?
(Assume for this part of the question that there is no effective limit to market size and
production capacity)
(b) If the business has maximum machine capacity for next year of 10,000 hours, in which order of
preference would the three products come?
(c) The maximum market for next year for the three products is as follows: Product A 3,000 units,
Product B 2,000 units and Product C 5,000 units

What quantities of which product should the business make next year and how much profit would this be
expected to yield?

Abstracted from Atrill, Mclaney, Harvey, and Jenner, Accounting An Introduction, 4e, 2009. Pearson. 4
Problem 11:

Chemicals Manufacturers Co produces three related products namely Q1, Q2 and Q3. The following
information concerning these products has been obtained from the firm’s records.

Q1 Q2 Q3
Selling Price per unit $25 $30 $32
Variable cost per unit $15 $22 $20
Normal production 20,000 units 15,000 units 5,000 units

Total Fixed costs = $304,000.

The three products use the same raw material- ZIN. The following quantities are required by each
product:
Q1 – 0.20 kg of ZIN
Q2 – 0.25 kg of ZIN
Q3 – 0.30 kg of ZIN

Required:
a) What is the break-even point in total units, and for each product, if the present sales mix is maintained?
Assume sales are proportional to production.
b) The firm currently sells all of its normal production. However, in the coming year, it expects that the raw
material- ZIN- will be in short supply. What will be the effect on profit if production has to be reduced by
20% for all the three products? Show details of your calculations
c) The purchasing officer has advised the production manager that only 6000 kg of ZIN will be available
next year. The firm wishes to make the most profitable use of the available raw material. However, the
Managing Director has decided that at least 50% of normal production of each product be supplied to
existing customers. What is the most profitable way to use the supply of ZIN, and meet this requirement?
Show details of your calculations.

Abstracted from Atrill, Mclaney, Harvey, and Jenner, Accounting An Introduction, 4e, 2009. Pearson. 5