Section A

3. (a) Contribution margin per unit= Unit selling price – Unit variable costs

= $55 - $50

= $5

Contribution margin ratio= Contribution margin per unit ÷ Unit selling price

= $5 ÷ $55

= 9.09 %

Break-even point in dollars = Fixed cost ÷ Contribution margin ratio

= $350,000 ÷ 9.09%

= $3,850,385.038

Therefore break-even point in dollars using the contribution margin (CM) ratio is approximately
$3,850,385

(b) Break-even point in units using the mathematical equation

Sales – Variable costs = Fixed costs+ Net Income

$55Q - $50Q = $350,000 + $0

$5Q =$350,000

Q = $350,000÷ $5 = Fixed costs ÷ Contribution margin per unit

Q = 70,000 units

Therefore, the break-even point in units using the mathematical equation is 70,000 units.

(c) Margin of safety assuming actual sales are $1,282,500

Margin of safety in dollars = Actual sales - Break-even Sales

= $1,282,500 - $3,850,385

= -$2,567,885
Margin of safety ratio = Margin of safety in dollars ÷ Actual sale

= -$2,567,885 ÷ $1,282,500

= -200.225%

The negative value for the margin of safety indicates that the actual sales are below the break-
even point. Therefore the company need to increase its sales volume, reduce its costs, or both, to
get a positive margin of safety and turn a profit.

(d) Sales dollars required to earn net income of $450,000

Fixed costs $350,000

Target net income + $450,000

$800,000

Contribution margin ratio ÷ 9.1%

Required sales in dollars $8,791,208.8

Therefore, the sales dollars required to earn a net income of $450,000 is approximately
$8,791,209.
4. (a) Change in costs= 18,580- 16,200 = 2,380

High minus low= 10,500- 8,800= 1,700

Change in total costs ÷ High minus low level = Variable cost per unit

2380 ÷ 1700= $1.4 cost per unit

Therefore the variable cost per unit using the high-low method is $1.4

Activity level
High Low
Total cost 18,580 16,200
Less: Variable costs
10,500 x $1.4 14,700
8,800 x $1.4 12,320
Total fixed costs $3,880 $3,880

Fixed cost= 18580- (10500x$1.4)

=18580- 14700= $3880

Therefore the fixed cost is $3880.

(b) Total cost (9200 units) = $3880+ ($1.4x9200)

= $3880+ $12880 = $16,760

Therefore the total cost in 9200 units is $16760.

5. (a) Computations of the activity-based overhead rates

Estimated Expected Use of Cost Activity-Based

Activity Cost Pools Overhead ÷ Drivers per Activity = Overhead Rates

Purchasing $ 600,000 1,500 orders $400 per order

Processing 1,450,000 500,000 gallons $2.9 per gallon

Washing and
cleaning equipment 630,000 200,000 batches $3.15 per batch
Testing 290,000 2,000 tests $145 per test
Storage and inventory control 230,000 22,000 gallons $10.45 per gallon
$3,200,000

(b) Assignment of each activity’s overhead cost pool to each product

Oil-Based Paint Latex Paint
Expected Activity- Expected Activity-
Use of Based Use of Based
Activity Cost Cost Drivers Overhead Cost Cost Drivers Overhead Cost
Pools Per product x Rates = Assigned Per product x Rates = Assigned

Purchasing 600 $400 $ 240,000 900 $400 $360,000

Processing 300,000 $2.9 870,000 200,000 $2.9 580,000
Washing and
cleaning
equipment 180,000 $3.15 567,000 20,000 $3.15 63,000
Testing 1,100 $145 159,500 900 $145
130,500
Storage and
inventory control 12,500 $10.45 130,625 9,500 $10.45 99,275
Total assigned cost $1,967,125 $1,232,775
(c) Computation of the overhead cost per unit:
Oil-Based Paint Latex Paint
Total costs assigned $1,967,125 $1,232,775
Total units produced 420,000 650,000
Overhead cost per unit $4.68 $1.89

6. (a) Initial investment = $480,000

Estimated useful life = 5 years
Estimated salvage value= 0
Net annual income= $25,000
Cost of capital = 12%
Depreciation method- Straight-line with no salvage value
Discount factor for 5 periods at 12% = 3.60478
Depreciation per annum= Investment cost / Useful life
= $480,000 / 5 = $96,000 per year
Net annual cash flow= $25,000+$96,000=$121,000

Cash Payback Period= Cost of capital investment ÷ Net Annual Cash Flow
= $480,000 ÷ $121,000
= 3.97 years
(b) Present value at 12%
Discount factor for 5 periods $3.60478
Present value of net cash flows:
$121,000*3.60478 $436,178
Present value of net cash flows $436,178
Capital investment $480,000
Net present value $(43,822)
(c) Annual rate of return = Annual cash flow / Annual average investment
= $25,000 ÷ $240,000
= 10.4%
(d) The annual rate of return of 10.4% is lower than the cost of capital 12%. The cash payback
period is 79% of the project’s useful life. The project's cash payback period is approximately
3.97 years, which is less than the project's useful life of 5 years. So, it meets the company's
criterion for the cash payback period. A negative NPV indicates that the project's present value
of cash flows is less than the initial investment. Typically, a project with a positive NPV would
be accepted, but in this case, it's negative. Based on these evaluations, the recommendation is to
reject the project.

Section B
(a) 1. Account receivable turnover = Net credit sales / Average net receivables

= 2180÷102 = 21.37 (For Amster Ltd)

=2200÷250= 8.8 (For Berlin Ltd)

2. Inventory turnover = Cost of goods sold / Average inventory

= 680 ÷ 150= 4.53 times (For Amster Ltd)

= 750 ÷ 336=2.23 times (For Berlin Ltd)

3. Current ratio = Current assets / Current liabilities

= 262 ÷ 270 = 0.97: 1 (For Amster Ltd)

= 601÷ 275 = 2.18: 1 (For Berlin Ltd)

4. Acid test ratio = Quick assets / Current liabilities

= 112 ÷ 270 = 0.41:1 (For Amster Ltd)

= 265÷ 275 = 0.96: 1 (For Berlin Ltd)

5. Total asset turnover = Net sales / Total Assets

= 2180 ÷ 1235 = 1.76 times (For Amster Ltd)

= 2200 ÷ 1590 =1.38 times (For Berlin Ltd)

6. Fixed asset turnover = Net sales / Fixed assets

= 2180 ÷ 973 = 2.24 times (For Amster Ltd)

= 2200 ÷ 989 = 2.22 times (For Berlin Ltd)

7. Debts to Total Assets = Total debt / Total assets

= 280 ÷ 1235 = 22.7% (For Amster Ltd)

= 325 ÷ 1590 = 20.4% (For Berlin Ltd)

8. Gross profit as percentage of sales = Gross profit / Sales x 100

= 1500/2180 x 100/1 = 68.8% (For Amster Ltd)

= 1450/ 2200 x 100/1 = 65.9% (For Berlin Ltd)

9. Net Profit Margin = Net income / Net sales

= 1020 ÷ 2180 = 46.8% (For Amster Ltd)

= 989 ÷ 2200 = 44.6 % (For Berlin Ltd)

10. Times interest earned = Income before income taxes and interest expense / Interest expense

= (1020+90+13) ÷ 13 = 86.4 times (For Amster Ltd)

= (989+58+ 10) ÷ 10 = 105.7 times (For Berlin Ltd)

(b) Account Receivable Turnover: A higher account receivable turnover ratio indicates that a

company is more effective in converting its credit sales into cash. In Amster Ltd, with an account

receivable turnover ratio of 21.37, it indicates that Amster Ltd is exceptionally efficient in

collecting its accounts receivable. Conversely, Berlin Ltd's account receivable turnover ratio is

8.8, which is significantly lower compared to Amster Ltd. This suggests that Berlin Ltd takes

longer to collect its outstanding receivables compared to Amster Ltd.

 Inventory Turnover: In the case of Amster Ltd, an inventory turnover ratio is 4.53. This

indicates that Amster Ltd has relatively fast-moving inventory and efficient inventory

management. Berlin Ltd's inventory turnover ratio of 2.23 is lower compared to Amster Ltd. So

Amster Ltd's higher ratio suggests more efficient inventory management compared to Berlin Ltd.

Current Ratio: It compares a company's current assets to its current liabilities, with a

higher ratio generally indicating better liquidity and a stronger ability to cover short-term

liabilities. Berlin Ltd has a higher current ratio (2.18) compared to Amster Ltd (0.97). A higher

current ratio indicates that Berlin Ltd has a better ability to meet its short-term obligations using

its short-term assets.

Acid Test Ratio: Acid test ratio is 0.41:1 for Amster Ltd and 0.96: 1 for Berlin Ltd. A

higher acid test ratio indicates a stronger ability to cover short-term liabilities with liquid assets.

Berlin Ltd is in a relatively better position compared to Amster Ltd.

Total Asset Turnover: Total asset turnover is 1.76 times for Amster Ltd and 1.38 times for

Berlin Ltd. Amster Ltd is more efficient in utilizing its assets to generate sales revenue compared

to Berlin Ltd.

Fixed Asset Turnover : Fixed asset turnover is 2.24 times for Amster Ltd and 2.22 times

for Berlin Ltd. A higher fixed asset turnover ratio indicates better utilization of fixed assets in

generating revenue. Both Amster Ltd and Berlin Ltd demonstrate good efficiency in utilizing

their fixed assets to generate revenue.

Debts to Total Assets: Debts to Total Assets is 22.7% for Amster Ltd and 20.4% for

Berlin Ltd. Both companies have relatively low debts to total assets ratios. This indicates that

both companies have a lower proportion of their assets financed by debt, which can imply lower

financial risk and greater financial stability.

 Gross Profit as Percentage of Sales : Gross profit as percentage of sales is 68.8% for

Amster Ltd and 65.9% for Berlin Ltd. Amster Ltd has a higher gross profit margin compared to

Berlin Ltd. This suggests that Amster Ltd is generating a higher profit from its core operations

for every dollar of sales.

Net Profit Margin : Net Profit Margin is 46.8% for Amster Ltd and 44.6 % for Berlin Ltd.

Amster Ltd’s profit margin is slightly higher than Berlin Ltd. A higher net profit margin indicates

greater profitability and efficiency in managing expenses relative to revenue.

Times interest earned: Times interest earned is 86.4 times for Amster Ltd and 105.7 times

for Berlin Ltd. A high times interest earned ratio reflects financial strength and stability.

Comparing the times interest earned ratios of Amster Ltd and Berlin Ltd, both companies exhibit

exceptionally high ratios, indicating a very strong ability to cover their interest expenses. But,

Berlin Ltd's times interest earned ratio is slightly higher than that of Amster Ltd, suggesting that

Berlin Ltd has an even stronger ability to cover its interest payments from its operating income.

Amster Ltd has higher account receivable turnover, inventory turnover, total asset

turnover, fixed asset turnover, and times interest earned, indicating better asset utilization and

liquidity management. Moreover, Amster Ltd also exhibits higher gross profit margin and net

profit margin, suggesting better cost management and profitability. Oppositely, Berlin Ltd, seems

to have a relatively lower performance in these areas. Overall, Amster Ltd appears to be in a

stronger financial position and better managed compared to Berlin Ltd based on the calculated

financial ratios.