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# Margin safety in dollars and provide 1 explanation on the usefulness of margin of safety information

Questions: 1.

Dream Limited manufactures ice cream. The company employs a process costing system for its manufacturing operations. All direct materials are added at the beginning of the process and conversion costs are incurred uniformly throughout the process. The company’s production quantity schedule for January is as follow: Unit (tubs) Work in process on 1 January (55% complete as to conversion) 8,000 Units started during January 11,000 Total units to account for 19,000 Units from beginning work in process, which were completed and transferred out during January 8,000 Unit started and completed in January 6,000 Work in process on 31 January (35% complete as to conversion) 5,000 Total units to account for 19,000 Required: a) Calculate each of the following amounts: Equivalent units of direct material during January. Use the FIFO method. Equivalent units of conversion during January. Use the FIFO method. iii. Equivalent units of direct material during January. Use the weighted average method. Equivalent units of conversion during January. Use the weighted average method. b) Explain the major difference between weighted average and FIFO method in process costing systems 2. You are the chief financial analyst of Hercules Manufacturing Limited. The company manufactures bowls and has been planning to aggressively expand its sales into the Middle Eastern markets. You have been tasked to analyse its reports using CVP and provide explanations to the Director, Tierra Muller. The operating statement relating to the month ended September 30, 2019 of Hercules Manufacturing Limited is as follows: \$’000 \$’000 Sales (22,000 units) 3,300 Direct materials 726 Direct labour 374 Production overheads 798 Total 1,898 Gross profit 1,402 Selling overheads 1,042 Net profit 360 The variable production overheads were \$9 per unit while the variable selling overheads were \$11 per unit.

Required:

a) Calculate the contribution margin per unit.

b) Calculate the breakeven sales in units, and provide one explanation on the usefulness of breakeven sales information.

c) Calculate the margin of safety in dollars and provide one explanation on the usefulness of margin of safety information.

d) The company has a capacity of 30,000 units per year. Management is not happy with the financial performance for the last year, and one course of action for the coming year were proposed in the recent management meeting: The sales manager believed that unit volume would increase by 30% with the incurrence of \$200,000 on advertising. Prepare a CVP income statement for the alternative (showing columns for totals only). Would you recommend this alternative and why?

e) The company has a target net income of \$750,000. Assume additional advertising costs will be incurred, what is the required sales in dollars for the company to meet its target?