Target selling price

Question 1

The management of The Far Corporation wishes to set the selling price on a new product using the absorption costing approach to cost-plus pricing. You are provided with the following estimates for the new product:

Per Unit Total
Direct materials R31
Direct labor R11
Variable manufacturing overhead R9
Fixed annual manufacturing overhead R160 000
Variable selling and administrative expenses R4
Fixed annual selling and administrative expenses R 25 000

The plan is to produce and sell 8 000 units of the new product annually. The new product would require an investment of R1 000 000 and has a required return on investment of 10%.

Required:
1.1. Determine the unit product cost for the new product.
1.2. Determine the markup percentage on absorption cost for the new product.
1.3. Determine the target selling price for the new product using the absorption costing approach.

Question 2
The following is TMS Volvo's contribution format income statement for last month:

Sales R 1 600 000
Variable expenses 1 200 000
Contribution margin 400,000
Fixed expenses 240,000
Net operating income 160,000

The company has no beginning/ending inventories and produced and sold 20,000 units during the month.
Required:
2.1. What is the company's contribution margin ratio?
2.2. What is the company's break-even in units?
2.3. If sales increase by 120 units, by how much should net operating income increase?
2.4. How many units would the company have to sell to attain target profits of R200 000?
2.5. What is the company's margin of safety in dollars?
2.6. What is the company's degree of operating leverage?

Question 3
The owner of Metro Steel SA has asked your help in preparing some key reports for July. The opening balance in the raw materials inventory account was R30 000. During the month, the company made raw materials purchases for R58 000. At the end of the month, the balance in the raw materials inventory account was R33 000. Direct labor cost was R40 000 and manufacturing overhead cost was R58 000. The beginning balance in the work in process account was R20 000 and the ending balance was R22 000. The opening balance in the finished goods account was R45 000 and the closing balance was R54 000. Sales totaled R250 000. Selling expense R15 000 and administrative expense R30 000.

Calculate:
1. The total manufacturing cost for July.
2. The cost of goods manufactured for July.
3. The cost of goods sold for July.
4. The net operating income for July.