Select And Apply Costing Systems And Techniques - Assignment Example

Running header: Management accounting Student’s name: Instructor’s name: Subject code: Date of submission: Management Accounting 1 Computation of direct materials cost per unit. Material type Price Total cost Components R1 R2 R3 R4 R4 R6 R7 R8 VR1 £ 0.022 £0.022 £0.022 £0.18 £0.063 £0.013 £0.013 £0.18 £0.53 £1.045 Capacitors C1 C2 £0.93 £0.11 £1.04 Semiconductors ICI Tr1 D1-D4 £1.46 £0.94 £0.31 £2.71 Transformer T1 £5.25 £5.25 Switches S1 S2 £1.59 £1.25 £2.84 Miscellaneous 1.5A 20mm Fuse Mains indicator Moving coil Twin terminal Euro socket Euro mains Printed circuit Aluminium cable IMR Logos £0.09 £0.41 £1.78 £5.6 £1.15 £3.63 £0.685 £1.1 £6.42 £1.2 £22.065 £34.95 Other variable costs per unit £7.25 £7.25 Total variable costs per unit £42.2 Assumptions: If unit price is £60, 14,000 units will be sold If unit price is £55, 20,000 units will be sold If unit price is £50, 26,000 units will be sold Fixed cost = £140,000 Units Variable cost Fixed cost Total cost Total revenue 0 0 £140,000 £140,000 £0 14,000 £590,800 £140,000 £730,800 £840,000 20,000 £844,000 £140,000 £984,000 £1,100,000 26,000 £1,097,200 £140,000 £1,237,200 £1,300,000 If a unit is sold at £60, Units Variable cost Fixed cost Total cost Total revenue 0 0 £140,000 £140,000 £140,000 5,000 £211,000 £140,000 £351,000 £300,000 10,000 £422,000 £140,000 £562,000 £600,000 14,000 £590,800 £140,000 £730,800 £840,000 Break even point at a selling price of £60 NB// y axis = revenue/cost NB// x axis = number of units sold NB// Series 1 is Fixed cost NB//Series 2 is Total cost NB// Series 3 is total revenue If a unit is sold at £55 Units Variable cost Fixed cost Total cost Total revenue 0 0 £140,000 £140,000 £0 5,000 £211,000 £140,000 £351,000 £275,000 10,000 £422,000 £140,000 £562,000 £550,000 14,000 £590,800 £140,000 £730,800 £770,000 20,000 £844,000 £140,000 £984,000 £1,100,000 Break even point at a selling price of £55 NB// y axis = revenue/cost NB// x axis = number of units sold NB// Series 1 is Fixed cost NB//Series 2 is Total cost NB// Series 3 is total revenue If a unit is sold at $50 Units Variable cost Fixed cost Total cost Total revenue 0 0 £140,000 £140,000 £0 5,000 £211,000 £140,000 £351,000 £250,000 10,000 £422,000 £140,000 £562,000 £500,000 14,000 £590,800 £140,000 £730,800 £700,000 20,000 £844,000 £140,000 £984,000 £1,000,000 26,000 £1,097,200 £140,000 £1,237,200 £1,300,000 Break even point at a selling price of £55 NB// y axis = revenue/cost NB// x axis = number of units sold NB// Series 1 is Fixed cost NB//Series 2 is Total cost NB// Series 3 is total revenue From the charts; NB// the break even points on the charts are slightly different from the calculated (due to use of estimation) break even points but since the requirements are for a chart, the chart break even points are used for the purpose of this question. i) From the charts, the breakeven point at a selling price of £60 is 8000 units. If calculation is used, the exact breakeven point is 7,865 units. ii) At a selling price of £55, the break even point is 11,000 units. The exact break even point using calculation is 10,937.5 units iii) At a selling price of £50, the break even point is 18,000 units from the graph. The exact breakeven point using calculation is 17,948.72 units Profitability at various breakeven points i) When each unit is sold at£60 The maximum number of units sold = 14,000 units The total revenue attained at this level =£840,000 The total cost for this level of sales = £730,800 Profit at this level of sales = total revenue – total cost Total profit = £840,000-£730,800 =£109,200 ii) At a selling price of £55 per unit; Maximum number of units sold at the selling price =20,000 units Total revenue for this level of sales =£1,100,000 Total cost at this level of sales = £984,000 Profitability at this level of sales = total revenue –total cost Total profit = £1,100,000 -£984,000 =£116,000 iii) At a selling price of £50 per unit , Maximum level of sales at the selling price = 26,000 units Total revenue for this level of sales =£1,300,000 Total cost at this level of sales =1,237,200 Profitability at this level of sales = total revenue – total cost Total profit = £1,300,000 – £1,237,200 =£62,800 Decision: As has been established above, the highest level of profits will be realised if the company sells at a price of £55 per unit when the profit will be £116,000. As such, I would recommend that the company adopts the price of £55 for maximum profitability all other factors held constant. Should the company replace the Aluminium case? Effect of aluminum case replacement: The current cost of the aluminum case is £6.42 The new case will cost £3.96. Hence, the company can save£2.46 (6.42 -3.96). Arising from the discussion above, the best price for the company to sell its products is $55 and hence it is assumed that the company will sell at this price. In addition, 25,000 new cases are available and hence this is enough for the company’s current demand of 20,000 units at a selling price of $55. The effect of replacing the aluminum case is analysed below; Units sold Fixed cost Total cost Total revenue 0 £140000 £140000 £0 5000 £140000 £338700 £275000 10000 £140000 £537400 £550000 14000 £140000 £696360 £770000 20000 £140000 £934800 £1100000 Change in breakeven point on replacing the aluminum cable. NB// y axis = revenue/cost NB// x axis = number of units sold NB// Series 1 is Fixed cost NB//Series 2 is Total cost NB// Series 3 is total revenue Since the maximum units sold at£55 is 20,000 units, Total revenue at this price =£ 1,100,000 Total cost for the 20,000 units = £934,800 Total profit for the 20,000 units = £ 165,200 Previous profit = £116,000 Improvement in profits = £49,200 Decision; As has been observed above, the company’s profitability will improve by £49,200 if the aluminum case is replaced. As such, as long as changing the case does not interfere with sales and product quality, I would recommend that the company adopts the new case which is cheaper. This is because it leads to improved level of profits. However, care should be taken to ensure that the new case does not adversely affect the company’s image and hence sales incase the customers deem it to be of lower quality. Special order decisions: The new order is of 5,000 units. Factors to consider; Capacity- there is an idle capacity of 5,000 units (as the new aluminum cases can only be supplied to a maximum of 25,000 units) since the company’s production at a selling price of £55 is 20,000 units. Whether the special order leads to a positive contribution- generally, if it leads to a positive contribution, it will be accepted. Calculation of contribution: Variable costs Variable costs other than materials = £7.25 Materials £ (34.95 -2.46) = £32.49 since the aluminum case has been replaced. Total variable cost = £39.74 Contribution per unit = £0.26 which is positive contribution (40-39.74) Total contribution for the 5000 units = £1,300 (0.26*500) Since the level of fixed cost at this level of production is expected to remain fixed at £140,000, then the positive contribution implies that by accepting the order, the company’s profitability will improve by £1,300. Decision: It has established that the company has the capacity to produce the extra 5,000 units required. It has also been established that producing the extra 5000 units can lead to an additional £1300 in the company’s profitability. As such, the company should accept to produce the additional 5000 units for the customer at a price of £40. Make or buy decisions: Should the company start making its own boards? Additional investment/ capital cost is £100,000 which will be spread over ten years time. This means that the company’s annual overheads will increase by £10,000 The current cost of buying printed circuit boards is £1.1 Cost of making the boards is £0.75 Assuming that the company sells at £55 per unit and has accepted the special order above, only 25000 units will be required. As such, the company has the capacity to produce enough printed boards since the capacity of the new machine is 1000 per week. Hence the annual capacity is 52* 1000 or 52,000 boards. Whether to make or buy the boards? Make: At £55 per unit Make Buy Variable costs per unit £39.39 £39.74 Fixed cost £150,000 $140,000 Revenue per unit £55 £$55 Contribution per unit £15.61 £15.26 Assumption: 20,000 units produced are sold at £55 5,000 units produced are sold at £40 Make Buy Variable costs 39.39*25000 =£984750 39.74*25000 =£993.500 Fixed cost £150,000 £140,000 Total cost £1,134,750 £1,133,500 Revenue (20,000*55+5000*40) =£1,300,000 (20,000*55+5000*40) =£1,300,000 contribution £165,250 £166,500 Decision: Whether to make or buy the boards? It has been established that the company has the capacity to produce enough boards for its annual production requirements. It has also been established that producing own printed circuit boards would result in improvement in contribution from £15.26 per unit to £15.61 per unit. However, the increase in contribution is not big enough to offset the huge increase in the annual overheads that result from acquiring the ne production machine. As such, producing the printed circuit boards would reduce the company’s level of profitability from £166,500 to £165,250 as has been established above. As such, I would recommend that the company continues to buy the printed circuit boards. However, the company can still opt to produce own printed circuit boards subject to consideration of the factors below; i) If the company can be able to get a better deal on the machine that would enable it increase its profitability by making own boards ii) If making own boards will have a positive impact on sales and hence profitability iii) If the quality of the boards being purchased is deemed poor iv) If there are expectations that the suppliers of the boards will close shop or increase the prices at which the boards are being bought at currently. References: Kaplan, R2011, Management accounting: Information for decision making and strategy execution, Sydney, Prentice Hall. Read More