QUESTION THREE (25 MARKs) a) Boon Hock is considering opening a Fast \'n Clean C
ID: 2541303 • Letter: Q
Question
QUESTION THREE (25 MARKs) a) Boon Hock is considering opening a Fast 'n Clean Car Service Center. He estimates that the following costs will be incurred during his first year of operations: Rent RM9,200, Depreciation on equipment RM7,000, Wages RM16,400, Motor oil RM2.00 per quart. He estimates that each oil change will require 5 quarts of oil. Oil filters will cost RM3.00 each. He must also pay The Fast 'n Clean Berhad a franchise fee of RM1.10 per oil change, since he will operate the business as a franchise. In addition, utility costs are expected to behave in relation to the number of oil changes as follows: Number of Oil Changes 4,000 6,000 9,000 12,000 14,000 Utility Costs RM 6,000 RM 7,300 RM 9,600 RM12,600 RM15,000 Boon Hock anticipates that he can provide the oil change service with a filter at RM25 each. Required (i) Using the high-low method, determine variable costs per unit and total fixed costs. 8 marks) (ii) Determine the break-even point in number of oil changes and sales dollars. (8 marks) (iii) Without regard to your answers in parts (a) and (b), determine the oil changes required to earn net income of RM20,000, assuming fixed costs are RM32,000 and the contribution margin per unit is RMS (4 marks) b) Mercer has three product lines in its retail stores: books, videos, and music. Results of the fourth quarter are presented below: BooksMuic 2,000 Units sold Revenue Variable departmental costs Direct fixed costs Allocated fixed costs Net income (loss) 1,000 2,000 RM20,000 RM40,000 RM25,000 RM85,000 51,000 6,000 17,000 1,000 22,000 3,000 2,000 M (5,000) RM 8,000 M 4,000 RM 7000 The allocated fixed costs are unavoidable. Demand for individual products are not affected by changes in other product lines. Required What will happen to profits if Mercer discontinues the Books product line? Show your (5 marks) ContinuedExplanation / Answer
Answer a
(i) Calculating variable & fixed cost using high low method:
Variable Cost per unit = Difference in total cost of high & low level / Difference in units at high & low level = 9000/10000 = 0.90 per unit
Fixed Cost = 15000 - (14000*0.9) = 15000 - 12600 = 2400
(ii)Breakeven Point:
Breakeven Point (Units) = Fixed Cost / Contribution Margin per unit = 35,000 / 10 = 3,500 No. of Oil Changes
Breakeven Point (RM) = Fixed Cost / Contribution Margin (%) = 35,000 / 40% = RM 87,500
(iii) Oil Changes required to earn net income of RM 20,000
Fixed Cost (given) = 32,000
Contribution Margin = RM 8
No. of Oil changes required = (Fixed Cost + Required Profit) / CM per unit = (32000+20000)/8 = 6500
Answer b
Net / gain or loss on discontinuation of Books Product Line
Since, allocated fixed cost is incurred irrespective of closure of books product line, it is irrelevant for calculation.
If books product line is closed, the resultant profit of Mercer will be as follows:
Units Total Cost High Level 14000 15000 Low Level 4000 6000 Difference 10000 9000Related Questions
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