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  • 1.  Help Explain answer of questions- Part 2

    Posted 08-09-2020 11:05 AM
    Hello,
    Can you explain answer of these questions? I cannot find out how to get this

     Question 28 (Answer A)

    Lazar Industries produces two products, Crates and Boxes. Per unit selling prices, costs. and resource utilization for these products are as follows.

                                              Crates.      Boxes

    Selling price.                   $20            $30

    Direct material costs.      5                 5

    Direct labor costs.            8               10

    Variable overhead costs  3                5

    Variable selling costs.     1               2

    Machine hours per unit.   2              4

    Production of Crates and Boxes involves joint processes and use of the same facilities. The total fixed factory overhead cost is S2,000,000 and total fixed selling and administrative costs are $840,000. Production and sales are scheduled for 500,000 units of Crates and 700.000 units of Boxes. Lazar maintains no direct materials, work-in- process, or finished goods inventory. Lazar can reduce direct material costs for Crates by 50% per unit, with no change in direct labor costs. However, it would increase machine-hour production time by 1-1/2  hours unit. For Crates, variable overhead costs are allocated based on machine hours. per What would be the effect on the total contribution margin if this change was implemented?

    A. $125,000 increase

    B. $250,000 decrease

    C.$300,000 increase

    D.$1,250,000 increase


    Question 20 (Answer C)

    Recent economic conditions are forcing MegaCorp to drop its price from $ 50 to $ 40 per unit, but the company expects its sales to rise from 600,000 to  750,000 units.  The company's current variable cost per unit is $ 38.  Suppose MegaCorp would like to maintain a 16% target contribution margin on its sales revenue.  To achieve this target, the company must lower its variable production costs by:

    A. $ 2.00 per unit. 

    B.$ 33.60 per unit. 

    C. $ 4.40 per unit. 

    D. $ 6.40 per unit. 



  • 2.  RE: Help Explain answer of questions- Part 2

    Posted 08-09-2020 10:14 PM

    Hello Van,

    question 20:
    Current price is $50, current variable cost is $38, therefore current contribution margin is $12 (or 24%). 

    now they want to maintain a contribution margin of 16% going forward after using the new sales price.
    New price $40, new contribution margin should be 16%, therefore, new variable cost should be [$40 - (40 x (1-.16)] = 33.6

    Therefore, reduction in variable cost is $38-33.6 = 4.4

    hope that helps.
    Jobin Thomas



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    Jobin Thomas
    Analyst
    Warwick PA
    United States
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  • 3.  RE: Help Explain answer of questions- Part 2

    Posted 08-10-2020 07:42 PM
    Hi VAN

    Hope you are doing well in the best of your health and spirits

    This is my solution to question # 28.

    The cost structure change is effected for Crates and not for Boxes. So our ​focus should be spot on with this issue. Other Fixed and common costs are irrelevant costs for the proposed change.

    Current Contribution Margin  = $3. this is computed by
    Sales Prices $20 minus VC of $17 ( DM $5 + DL $8 +V-OH $3+V.Selling Cost $1) , provides CM of $3

    Proposed change in Cost Components
    The new Contribution Margin =$3.25, this is arrived as follows:
    Sales Prices $20 minus VC of $16,25 ( DM $2.5* + DL $8 +V-OH $5.25**+V.Selling Cost $1) , provides CM of $3.25

    * 50% of $5 (reduction in Direct Material Cost) = $2.5
    ** Machine Hours Increase  for Crates is 3,5 hours per unit, prorated as ($3 X 3.5) /2= $5.25, allocated to Variable Overhead

    Increased (total)  Contribution is 500000 units of Crates  X($3.25-$3) = $125000

    I am happy to get your views, in case you see a different solution or approach.

    I wish you good luck in your CMA Journey.

    Kind regards
    Srirama



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    Srirama Nagarajan
    Chennai
    India
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  • 4.  RE: Help Explain answer of questions- Part 2

    Posted 05-27-2023 06:27 PM

    Dear Van,

    Question:28

    A. 125,000 increase is the correct answer

    The whole point is how to calculate the increase in machine hrs by 1-1/2
    and its calculated like the following:

    1. Start with the whole number part, which is 1. In this case, it represents 1 hour.

    2. Next, consider the fractional part, which is 1/2. This represents half an hour.

    3. To combine the whole number and the fractional part, add them together: 1 hour + 1/2 hour = 1.5 hours

    So, 1-1/2 hours is equivalent to 1 hour plus half an hour, which is 1.5 hours.

    we will add 1.5 to 2=3.5 hr and the rate per hr 3/2 = $1.5
    after change C.M=20-(2.5(0.5*5)+8+5.25(1.5*3.5hr)+1)=3.25*500,000 Units=1,625,000 C.M
    Previous C.M=20-17=3*500,000 units=1,500,000 C.M
    Means $125,000 C.M will increase 

    Regards,
    Awyana Badro



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    Awyana Badro
    Accountant
    Erbil-Ankawa
    Iraq
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