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QUESTION1 (6 Â MARKS)
The May 2011 income statement for BarbexCompany is given below:
Sales (10,000 units)Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $100,000
Less variable costs                                          70,000
                                                                               ------------
Contribution margin                                     30,000
Less fixed costs                                                24,000
                                                                               ------------
Net income                                                       $6,000
                                                                               ========
The Barbex Company has ample unusedcapacity and is studying various ways of improving profits.
Required:
Eachof the situations below is independent of the other. Provide the informationrequested.
1.      New equipment has come onto market that would allow Barbex Companyto automate a portion of its operations. Variable costs could be reduced by $3per unit. However, fixed costs would increase by $30,000 each month. Firstly, preparetwo contribution-type income statements, one showing present operations and oneshowing how operations would appear if the new equipment is purchased.Secondly, as a manager, what factors would be paramount in your mind indeciding whether to purchase the new equipment? Explain.
2.      Refer to the original data. Barbex Company is thinking aboutchanging its marketing method. Under the new method sale would increase by 15percent each month, and net income would increase by one third. Fixed costcould be slashed to only $15,000 per month. Calculate the break-even point forthe company before and after the change in marketing method.
3.      Refer to the original data. Due to a sudden and unprecedented surgein demand, the company’s sales increased by 25 percent during June 2011. Duringthat month, net income increased by $3,000, or by 50 percent. By how muchshould net income have increased? Would you congratulate management for anoutstanding performance, or would you chastise management for not doing its jobwell during the period? Explain.
QUESTION2 (6 MARKS)
Ballina Products manufactures anddistributes toys to retail outlets. One of the company’s products, RCHelicopter, requires 3 kilograms of material A in the manufacture of each unit.The company is now planning raw material needs for the third quarter of 20x1,the quarter in which peak sales of RC Helicopters occur. In order to keepproduction and sales moving smoothly, the company has the following inventoryrequirements:
a.      The finished goods inventory on hand at the end of each month mustbe equal to 5,000 units plus 25 percent of the next month’s sales. The finishedgoods inventory on June 30 is budgeted to be 13,750 units.
b.     The raw materials inventory on hand at the end of each month must beequal to one half of the following month’s production needs for raw materials.The raw materials inventory on June 30 is budgeted to be 54,375 kilograms.
c.      The company maintains no work in process inventories.
A sales budget for RC Helicopter for thelast six months of 20x1 is given below:
                                                               Budgets sales in units
July                                                       35,000
August                                                 40,000
September                                        50,000
October                                              30,000
November                                         20,000
December                                          15,000
Required:
Â
1.      Prepare a production budget for RC Helicopter for the monthsJuly-October.
2.      Examine the production budget which you prepared in (1) above. Whywill the company produce more units than it sells in July and August, and lessunits than it sells in September and October?
3.      Prepare a budget showing the quantity of material A to be purchasedfor July, August, and September 20x1 and for the quarter in total.
                                              Â
Question3 (6 Marks)
North Coast Surfers is a company thatproduces high-quality surf boards. North Coast Surfers participates in a supplychain that consists of suppliers, manufacturers, distributors and elite surfshops. North Coast Surfers uses carbon fibre for the surf boards because it isstrong and light and therefore increases the quality of the surf boards. NorthCoast Surfers has recently hired Janet Jackson as purchasing manager. Janetbelieves that she could reduce costs if she purchased carbon fibre from anonline marketplace at a lower price. North Coast Surfers has set up thefollowing standards based upon their experience with their previous suppliers.The standards are:
Cost of carbon fibre                                                      $20per kilogram
Carbon fibre used per surf board                            8kg
Actual results for the first month usingthe online supplier of carbon fibre are:
Surf boards produced                                                 500
Carbon fibre purchased                                                              6000kg for$108,000
Carbon fibre used in production                                              5,000 kg
Required:
Question4 (7 marks)
Explain Transfer Pricing, describe theadvantages of negotiated transfer pricing, and discuss the internationalaspects of transfer pricing. You must use real world examples to support yourdiscussions and disclose the source of your information.