Measurement and Decision Making - Case Study Example

A. Prepare an incremental analysis concerning the possible discontinuance of Discontinued operation Division 3 Division 4 Sales 310000 170000 expense (0.5 cut) -37500 -35000 Contribution 272500 135000 Fixed cost (0.4*37500) of expense) -15000 -14000 Total cost to be allocated to division 1&2 -52500 -49000 B. The course of action recommended for each division The discontinuance of division 3 and 4 is not recommended since it can be observed that both divisions depict a positive contribution (Bakuzonis 2007). It can as well as that the impact of discontinuance to the existing division 1 and 2 will depict a positive net profit which is still recommended that the division will not be discontinued but instead the company must review its operating expense in order to ensure that unnecessary cost is minimized. C. condensed income statement for Panda Corporation continued operation Division 1 Division 2 Division 3 Sales 510000 400000 310000 cost of sales -300000 -250000 -270000 Selling expense -60000 -80000 -75000 Incremental cost on discontinuance expense (0.5 cut*70000*0.6/3) -14000 -14000 -14000 Fixed cost (0.4*0.5*70000/3of expense) -9333 -9333 -9333 Net profit 126667 46667 -58333 D. Reconciliation of the total income from operations Reported total income 115000 Variable cost (Division 4) under-absorbed 14000 Net income closing 129000 Case study 2 A. Compute the break-even point in dollars for 2014. Break-even point= {Fixed cost/contribution margin} Contribution per unit =(1.25*2400,000-(1536000+(0.06*3000,000)+936000)/200,000 units}= Contribution per unit =(3000000-2652000*0.4)/200,000}=$9. 7 per unit Break-even point=(2652000*0.6)/9.7}=$165,041.24 B. the break-even point in dollars under each of the alternative courses of action 1. Option one increase the selling price by 25% Break-even point= {Fixed cost/contribution margin} Contribution per unit =(1.25*2400,000-(1536000)/200,000 units}= Contribution per unit =(3000000-1536000)=1464000 =(3000000-1536000)/200,000}=$7.32 per unit Break-even point=(936000/7.32)= $ 130,000 2. Option two; Change the compensation of salespersons from fixed annual salaries Break-even point= {Fixed cost/contribution margin} Contribution per unit =(2400,000-(1536000+(0.06*2400000) Contribution per unit =(3000000-1536000)=1464000)=720,000 =(720,000)/200,000}=$3.6 per unit Break-even point=(936000-120000)/3.6= $226,667 Option three; Purchase new high-tech factory machinery will change the proportion between variable and fixed cost of goods sold to 40:60. Fixed cost (0.6*2472000)=1483200 Variable cost (0.4*2472000)= 988,800 Break-even point= {Fixed cost/contribution margin} Contribution per unit =(2400,000-(1536000) Contribution per unit =(240000-988800)= 1411200 =1411200)/200,000}=$7.056 per unit Break-even point= {1483200/7.056) = $210,204.08 From the above assessment of the contribution margin in the three options, it is considered that alternative to is deeming significant since the option will generate the highest contribution amongst the three alternatives to be undertaken as an effort of improving the business operation in the year 2014. c. Break-even analysis is of limited use to management because a company cannot survive by just breaking even.” The statement is false since, at break-even point, the company survives covering only variable cost in which case the company cannot make profit or loss and thus it can exist by meeting the expense of variable cost until the company regain from financial loss. Case study 3; memo to Bjorn Borg The analysis that the company should do before it makes this decision Dear Bjorn Borg In making an analysis to cut a production line some factors both financial and non-financial must be taken into consideration. For instance, the company must consider the contribution that is realized from production of traditional fishing anchor. If the production line is generating positive contribution, then the production line should not be cut since, the production can cover its variable cost (Bruns 2005). A decision of whether to add or drop a production li9ne is made on the basis of the variable overhead realized from investment as well as the amount of variable cost to be incurred. As a result, the company should not cut the production of traditional fishing anchor as much as the yatch boat is making three times contribution because it is apparent that a positive contribution is realized from the production of traditional fishing anchor. The company should as well, as consider the impact that the existing production line will have on effect of dropping of the production line. It is obvious that dropping a production a line will lead to distribution of cost to other operating production ;line which may impact the amount of reported profit. As a result the decision to cut the production of traditional fishing anchor must well research and both factors is appraise in detail in order to ensure that the decision will not impact the other running divisions (Budgeting 2009). PART B 1. Awareness of the importance of decision making as a management The learning outcome as significantly demonstrated on managerial skills applicable in the day to day business operation since, the decision to discontinue or continue a production line place more importance on the effect of variable cost since fixed cost is considered irrelevant in making a decision. The operation of production line is on the basis of the level of contribution realized on the production line (Ekholm 2000). A company can operate at break-even point which is achieved at the point where variable cost is same as the reported net profit which implies that an investment decision of closing a production line will be optimal if the production line is operating at break-even [point since, it can cover its variable cost effectively. 2. Model or tool most influenced The model of break-even point influenced me so much since, I conceptualized that a company operating at loss can survive in the market if it can only cover the variable cost. Break-even point is achieved at the point where net income is the same as variable cost (Janet M. Kelly n.d.). Fixed cost is therefore considered as irrelevant since where the company make a sale or not, it must cover its fixed cost and consequently in making a decision of whether to add or drop a production line, the variable cost and the level of contribution margin per u it is considered significant. 3. The quality of decision making is to an organization The quality of decision making in an organization is important since decision depend the success or failure of a company. Informed investment decision will ensure that the business going concern is guaranteed due to preciseness of the investment decision. The impact of low quality decision to an organization will impact the success of the business since, investment decision entail the huge capital outlay in which case if a return inform of profit is not realized from investment due to poor decision making, the company will incur huge loss that might affect its financial situation and the effectiveness of the going concern. 4. The models and tools would you use as a manager The model that is considered significant for the management decision making is the use of break-even point as a forecasting tool for manager (Pamela P. Peterson 2004). The model is considered important to the managers since they help them in appraising the performance of the company on the basis of the extent to which the company can covers it variable cost effectively. The model provides that the company can drop a production where the production line generates negative contribution which implies that the net income cannot cover the daily variable cost of the company. Reference list Bakuzonis, Karen. Performance-based Budgeting AA Measures Outcomes . 2007. Bruns, W.and J. Waterhouse. "Budgetary control and organisation structure." Journal of Accounting Research 13 (2005): 177-203. Budgeting, A Basic Model of Performance-Based. Marc Robinson, ‎Mr. Duncan Last. New york, 2009. Ekholm, B.and J. Wallin. "Is the annual budget really dead." In review, European Accounting. 2000. examples, Performance-based budgeting: concepts and. Greg Hager, ‎Alice Hobson, ‎Ginny Wilson . 2001. Gerald Miller, ‎W. Bartley Hildreth, ‎Jack Rabin. Performance Based Budgeting. London, 2001. Janet M. Kelly, ‎William C. Rivenbark. Performance Budgeting for State and Local Government . Pamela P. Peterson, ‎Frank J. Fabozzi. Capital Budgeting: Theory and Practice. 2004. Wildavsky, Aaron B. Budgeting: A Comparative Theory of the Budgeting Process. 2006. Read More