MGM624-0901A-01 Applied Accounting for Decision-Making - Phase 1 Discussion Board 2 - Essay Example

JetSet Travel Inc Accounting For Decision Making Setara Number: XXXXX of XXXXXX 16 January 2009Total Number of Words: 832 wordsPhase 1 – Task 3Scenario:JTI’s annual fixed cost for the luggage line is $500,000 and variable cost per luggage set is $100, whereas the selling price is $300. When the variable costs increase by 15%, the variable cost per unit becomes $115. Contribution per unit = Selling Price – Variable cost = $300 - $115 = $185Break even volume = Fixed Costs / Contribution per unit = $500,000/$185 = 2,703 units (Pendlebury and Groves, 2004) Thus the increase in the variable costs has increased the breakeven point volume to 2,703 from (500,000/200) 2,500 units.

Hence it is essential to cut down the variable costs in order to lower the break even point.Lowering the Break even point:a) Increase in Selling Price:In the case of JTI, the best possible method to lower the break even point is to increase the price of the luggage sets, as the products are targeted on the niche customer segment that prefer the light weight durable luggage sets (Jobber, 2004). However, a steep increase in the prices will have an adverse effect on the sales volume. Hence an increase of 5% in the sales price will bring the break even volume back to [500,000 / (315 – 115)] 2,500 units. b) Increase Productivity:It is evident that JTI has invested heavily in the initial manufacturing of the new luggage line.

Steps have to be taken to increase productivity of the entire manufacturing process, by reducing wastage and increasing the effectiveness of the labour. The effectiveness of the resources can be attained by introducing incentives based on performance. Awards can also be presented to the most effective employees every month and this will act as a motivating factor for the employees to increase the productivity (Samuels et al, 2000). Assuming that theses schemes reduce the variable costs to $110, then the break even volume becomes [500,000 – (315 – 110)] 2,440 units.

Associated Risks:There is a risk of losing sales volume, when the price is increased. The increase in price is profitable as long as the sales volume remains at 3,600 units. It is essential to consider the number of customers JTI stands to lose by increasing the prices (Baker et al, 2008). There are a number of risks involved in introducing incentives based on performance to increase the performance. The management has to set up benchmarks to quantify performance. In case the goals set are impossible to attain, the scheme will de-motivate the employees and can have a negative impact on productivity.

Also, if the goals are very simple to attain, then the company stands to lose more in terms of incentive payouts to the employees (Latham, 2004). Hence excessive care has to be taken to set the benchmarks against which the performance of the employees will be measured. Conclusion:From the above arguments, it is clear that JTI has to increase prices and also increase the productivity in order to maintain its profitability. The necessary proposal is also explained which will decrease the variable costs and also lower the breakeven point.

However, the management has to be careful and consider all the risks associated with the proposal before taking the decision.BibliographyBaker, R.E., Lembke, V. C., King, T. E., and Jeffrey, C. G., 2008, Advanced Financial Accounting, 8th Stage Edition, 13 November 2008, Mcgraw - Hill CollegeJobber, D., 2004, Principles and Practice of Marketing, 4th edn, McGraw Hill, BerkshireLatham, G. P., 2004, ‘The Motivational Benefits of Goal-Setting’, Academy of Management Executive, Nov 2004, Vol.

18, Issue 4, p126-129Pendlebury, M. and Groves, R., 2004, Company Accounts – Analysis, Interpretation and Understanding, 6th edn, Thomson Learning, LondonSamuels, J. M., Wilkes, F. M. and Brayshaw, R. E., 2000, Management of Company Finance, 6th edn, Thomson Learning, London