Analysis And Evaluation Of Three Proposals For The Board Of Directors
Proposal by David Groate
The following data relates to Pacific Telemet Ltd. which is engaged in the manufacturing of high end smart phones with dual sim cards. The following two tables give financial information about the company from last year and also shows the profit that the company earned under current situation (Atkinson, 2012).
|
Financial data from last year |
|
|
Sales |
12,000 |
|
Selling price |
460 |
|
Variable manufacturing cost |
184 |
|
Fixed manufacturing costs |
3,60,000 |
|
Variable selling and administrative costs |
36 |
|
Fixed selling and administrative costs |
6,00,000 |
|
Profit statement (under current circumstances) |
|
|
Particulars |
Amount |
|
Sales |
55,20,000 |
|
Less: |
|
|
Variable manufacturing cost |
22,08,000 |
|
Fixed manufacturing costs |
3,60,000 |
|
Variable selling and administrative costs |
4,32,000 |
|
Fixed selling and administrative costs |
6,00,000 |
|
Profit/Loss |
19,20,000 |
The calculations shown below provide us the information regarding profits under various alternatives:
Alternative 1:
|
Proposal by David Groate |
|
|
Sales |
15,600 |
|
Selling price |
460 |
|
Variable manufacturing cost |
220 |
|
Fixed manufacturing costs |
3,60,000 |
|
Variable selling and administrative costs |
36 |
|
Fixed selling and administrative costs |
6,00,000 |
|
Advertisement charges |
60,000 |
|
Profit statement |
|
|
Particulars |
Amount |
|
Sales |
71,76,000 |
|
Less: |
|
|
Variable manufacturing cost |
34,32,000 |
|
Fixed manufacturing costs |
3,60,000 |
|
Variable selling and administrative costs |
5,61,600 |
|
Fixed selling and administrative costs |
6,00,000 |
|
Advertisement charges |
60,000 |
|
Profit/Loss |
21,62,400 |
We can see that the profits under this alternative are higher than what is expected (Berry, 2009). The extra expenditure of $60000 on advertisement and the increase in variable cost by $36 per unit would help to earn extra profits of $ 242400.
Alternative 2:
|
Proposal by Kristen Arnold |
|
|
Sales |
10,560 |
|
Selling price |
520 |
|
Variable manufacturing cost |
184 |
|
Fixed manufacturing costs |
3,60,000 |
|
Variable selling and administrative costs |
36 |
|
Fixed selling and administrative costs |
6,00,000 |
|
Advertisement charges |
1,20,000 |
|
Profit statement |
|
|
Particulars |
Amount |
|
Sales |
54,91,200 |
|
Less: |
|
|
Variable manufacturing cost |
19,43,040 |
|
Fixed manufacturing costs |
3,60,000 |
|
Variable selling and administrative costs |
3,80,160 |
|
Fixed selling and administrative costs |
6,00,000 |
|
Advertisement charges |
1,20,000 |
|
Profit/Loss |
20,88,000 |
It is observed that the profits earned under this alternative are higher than the profits earned by the company in normal circumstances (Boyd, 2013). Although there is an increase in the advertisement expense by $120000 and decrease in sales volume by 12% , the extra profits earned by the company under this alternative are $168000.
Alternative 3:
|
Proposal by Jess Sutherland |
|
|
Sales |
14,000 |
|
Selling price |
460 |
|
Variable manufacturing cost |
184 |
|
Fixed manufacturing costs |
3,60,000 |
|
Variable selling and administrative costs |
36 |
|
Fixed selling and administrative costs |
6,00,000 |
|
Rebate |
1,00,000 |
|
Advertisement charges |
50,000 |
|
Profit statement |
|
|
Particulars |
Amount |
|
Sales |
64,40,000 |
|
Less: |
|
|
Variable manufacturing cost |
25,76,000 |
|
Fixed manufacturing costs |
3,60,000 |
|
Variable selling and administrative costs |
5,04,000 |
|
Fixed selling and administrative costs |
6,00,000 |
|
Rebate |
1,00,000 |
|
Advertisement charges |
50,000 |
|
Profit/Loss |
22,50,000 |
In this proposal Jess recommended to provide $40 rebate to the first 2500 phones that are sold and also increase the advertisement expense by $ 50000. But it was observed that the profits under this alternative were found to be the highest because he expects that there would be an increase in sales volume by 2000 units (Holtzman, 2013). The extra profits that the company earned under this circumstance are $330000.
From the calculation shown above, we can observe that the profits earned by the company are higher than the profits under normal circumstances under all the alternatives. It is important to take into consideration both qualitative and quantitative factors for the pricing of a particular product. On the basis of quantitative factors, the alternative that helps to derive highest profits should be chosen. There are certain qualitative factors also that should be taken into consideration such as the product quality (Horngren, 2012). The company should not compromise with the product quality to decrease the price. In order to improve the profitability of a particular product the company must take steps to promote the product and try to increase its sales volume. A higher sales volume will help the company in generating higher revenues.
- The annual production capacity of the company is 90,000 units. However the spare capacity of the company is 30,000 units. The capacity required for the production of special order is 20,000 units. This means that the company can take up special order because the company has enough spare capacity to produce as it would lead to generation of higher revenues (Noreen, 2015). The calculation of bid price is shown below:
|
Cost statement – special order |
||
|
Direct Material Cost |
30,00,000 |
|
|
Direct Labor Cost |
15,00,000 |
|
|
Variable Factory Overhead |
7,00,000 |
|
|
Fixed Factory Overhead |
8,00,000 |
|
|
Total Manufacturing Cost |
60,00,000 |
|
|
Units |
20,000 |
|
|
Bid Price per unit |
300 |
It is assumed that the annual capacity of the company is 75,000 units. The current production of the company is 60,000 units and the spare capacity of the company is only 15,000 units. The company has two options either to compromise with the current production or to reject the order completely (Seal, 2012). If the company compromises with the current production then it will have to bear loss of $ 18, 00,000. The bid price under this circumstance will be as follows:
|
Cost statement – special order |
||
|
Direct Material Cost |
30,00,000 |
|
|
Direct Labor Cost |
15,00,000 |
|
|
Variable Factory Overhead |
7,00,000 |
|
|
Fixed Factory Overhead |
8,00,000 |
|
|
Total Manufacturing Cost |
60,00,000 |
|
|
Loss of profits from existing demand (5000*360) |
18,00,000 |
|
|
Total Cost |
78,00,000 |
|
|
Units |
20,000 |
|
|
Bid Price per unit |
390 |
This calculation shows that if the company accepts the special order then it must charge anything above $390 per unit from customers. If the annual production capacity of the company is 90000 units the company will be left with a spare capacity of 30000 units. The company can accept the special order after fulfilling the normal demands as the number of units that has to be produced in special order is 20000 units only. The company must accept the special offer as it will help the company in earning higher profits. There will be no extra cost associated with the production of this special order. The company must look upon the production cost and margin while taking decision of accepting the special order. The bid price under this situation is $300 per unit which means that the company must not charge anything below $300 per unit. The company has to look upon both qualitative and quantitative factors before accepting this order. Under quantitative factors, the company must check if there is any spare capacity or not (Siciliano, 2015). If the spare capacity is sufficient for producing the special order then the company must accept the proposal as it would increase the sales volume of the company which would increase the profitability. Under quantitative factors, the company must check that the quality of the product is not compromised because of the acceptance of special order. If the company compromises with the quality of the product then the customer base of the company might get hurt which will have adverse impact on the company in the long run As we know, it is the duty of the company to satisfy the customers because customers are considered to be the king of every business. No company can survive in the long run if it ignores the satisfaction of the customer and only focus on profitability.
Atkinson, A. A. (2012). Management accounting. Upper Saddle River, N.J.: Paerson.
Berry, L. E. (2009). Management accounting demystified. New York: McGraw-Hill.
Boyd, W. K. (2013). Cost Accounting For Dummies. Hoboken: Wiley.
Holtzman, M. (2013). Managerial Accounting For Dummies. Hoboken, NJ: Wiley.
Horngren, C. (2012). Cost accounting. Upper Saddle River, N.J.: Pearson/Prentice Hall.
Noreen, E. (2015). The theory of constraints and its implications for management accounting. Great Barrington, MA: North River Press.
Seal, W. (2012). Management accounting. Maidenhead: McGraw-Hill Higher Education.
Siciliano, G. (2015). Finance for Nonfinancial Managers. New York: McGraw-Hill.