The number of balloon rides required each month to break even

QUESTION 1 (11 marks)

Jian, Parimbal and Dan are considering setting up a company providing 2 hour hot air balloon trips for groups of 10 tourists at a time. The trips will include some food and drink for the tourists. They have done some market analysis and believe it is feasible to charge a price of $1,000 for each group of 10 tourists. Further, they have gathered some data on the likely costs of the business as below: Variable costs Fuel $ 150 Wages of pilot $ 500 Food & drink $ 100 Fixed costs per month Rental of balloon $ 5 000 Insurance $ 1100 Transport & storage $ 500 Maintenance $ 800

REQUIRED:

1. Calculate:

a) The number of balloon rides required each month to break even. (2 Marks)

b) The sales revenue required each month to break even. (2 Marks)

c) The number of balloon rides required to make a profit of $10,000 each month. (2 Marks)

2. Now assume that the company will be subject to an effective tax rate of 20%. In addition, assume that the business decides to pay salespeople a 5% commission fee on every trip (for groups of 10) sold and also pay an advertising agency $2000 per month to advertise the business. Calculate the number of balloon rides and the sales revenue required to make an after tax profit of $10,000. (5 Marks)

QUESTION 2 (18 marks)

Toorak Ltd produces components for wind turbines. The following data reflect activity for the year 2016: Costs incurred: Purchases of direct materials (net) on credit $124 000 Direct manufacturing labour cost 60 000 Indirect labour 54 500 Depreciation, factory equipment 30 000 Depreciation, office equipment 7 000 Maintenance labour, factory equipment 20 000 Miscellaneous factory overhead 9 500 Rent, factory building 70 000 Advertising expense 90 000 Sales commissions 30 000 Inventories: 1 January 2016 31 December 2016 Direct materials $ 9 000 $ 11 000 Work in process 6 000 21 000 Finished goods 69 000 24 000 Toorak Ltd allocates overhead to work in process at a rate of $3.50 per direct manufacturing labour dollar.

REQUIRED: Create journal entries for these transactions, including dealing with over or under allocated overhead.