HONG KONG BAPTIST UNIVERSITY - SEMESTER 2 EXAMINATION, . ACCT1006 Final Exam Submission

KC Ltd manufactures and sells a single product. Cost data for the product are given below Variable cost per unit Direct Materials Direct labour Variable manufacturing overhead Variable selling a nd administrative $3 Fixed costs per monthFixed manufacturing overhead Fixed selling and administrative The product sells for $60 per unit. The number of units produced and sold in January is 17,500 and 15,000 respectively. In February, the number of units produced is unchanged but the number of units sold is 20,000. The company prepared the following absorption costing income statement for January and February as below: Required: (a) Prepare the variable costing income statement for January and February. (9 marks) (b) Explain the difference between variable costing and absorption costing income statement for Question 2 CK Ltd manufactures 1GB flash drives. The maximum production capacity is 200,000 units per month. The information related to the selling price and other cost data are as follows: Sales price per unit (current monthly sales volume is 130,000 units) $20 Variable cost per unit Direct materials $6.2 Direct labour 7.0 Variable manufacturing overhead 2.0 Variable selling and administrative expenses 1.8 Monthly fixed expenses Fixed manufacturing overhead $ 102 300 Fixed selling and administrative expenses 187 800 Required: (a) Compute the breakeven point in units and sales dollars. (4 marks) (b) Management is currently in contract negotiations with the labour union. If the negotiations fail, direct labour costs will increase by 10% and fixed costs will increase by $22,500 per month. If these costs increase, how many units will the company have to sell each month to break even? (4 marks) (c) Return to original data for this question, determine the operating leverage. If sales volume increased by 7%, what would be the effect on its operating income? (3 marks)