Finance and Management

ACCT2002 Cost Analysis for Decision Making

02 June 2023 13:44 PM | UPDATED 10 months ago

ACCT2002 Cost Analysis for Decision Making :

ACCT2002 Cost Analysis for Decision Making
ACCT2002 Cost Analysis for Decision Making

Work Compilation Questions

Razr-Tech Manufacturing Ltd produces specialised computer parts for computer manufacturers around the world. Apart from the central processing unit (CPU), graphics processing unit (GPU), motherboard and Random Access Memory (RAM), Razr also produces small microprocessors. Two of its microprocessors are the Snapdragon and Exynos.

The Snapdragon is sold at $300 per unit while the Exynos is sold at $440 per unit. In 2023, demand for the Snapdragon is expected to be 24,000 units while demand for Exynos is expected to be 6,000 units. Estimated beginning inventory in 2023 for Snapdragon and Exynos are expected to be 600 and 300 units respectively, while the company desires to have ending inventory of 500 and 200 units respectively for Snapdragon and Exynos. Additional information for the production of Snapdragon and Exynos follows:

Finished Components
 Snapdragon Exynos
Requirements for each finished product:
xe3710grams8grams
APQ80640 4grams
mm855 Plus4grams2grams
Direct labour2hours3hours
ACCT2002 Value Analysis for Decision Making

Direct Materials Information
 xe37APQ8064mm855+
Cost per gram$2.00$2.50$1.50
Estimated beginning inventory in grams6,0001,5002,000
Desired ending inventory in grams5,0001,0002,500
ACCT2002 Value Analysis for Decision Making

Razr-Tech expects the average wage rate to be $36 per hour in 2023. Razr-Tech uses direct-labour hours to apply overhead. Each year the company determines the overhead application rate for the year based on the budgeted output for the year.

The company maintain negligible work-in-progress inventory and expects the cost per unit for both the beginning and ending inventory of finished goods to be identical.

Factory Overhead Information
  Indirect materials-variable  $10,000
Miscellaneous supplies and tools-variable$5,000
Indirect labour-variable$40,000
Supervision-fixed$120,000
Payroll taxes and fringe benefits-variable$250,000
Maintenance costs-fixed$20,000
Maintenance costs-variable$10,080
Depreciation-fixed$71,330
Heat, light, and power-fixed$43,420
Heat, light, and power-variable         $11,000  
Total       $580,830  
ACCT2002 Value Analysis for Decision Making

Selling and Administrative Expense Information
  Advertising  $60,000
Sales salaries$200,000
Travel and entertainment$60,000
Depreciation-warehouse$5,000
Office salaries$60,000
Executive salaries$250,000
Supplies$4,000
Depreciation-office       $6,000  
Total   $645,000  
ACCT2002 Value Analysis for Decision Making

Razr-Tech Manufacturing Ltd is subject to 30% income tax.

REQUIRED:

  1. Using EXCEL, prepare the following schedules or statements for 2023:
  1. Sales budget
    1. Production budget
    1. Direct materials purchases budget
    1. Direct labour budget
    1. Factory overhead budget (Hint: separate variable and fixed)
    1. Cost of good sold and ending inventory budget
    1. Selling and administrative expense budget (Hint: Separate selling and administrative expense)
    1. Budgeted income statement.
  • Snapdragon is a mature product and the sales manager believes that price can be increased by 10% to $330 without having an impact on sales.

Additionally, the sales manager believes that Exynos, which is a new product that was introduced last year has great potential. He believes that reducing the price to $400 is likely to double the sales of Exynos to 12,000 units.

Using the EXCEL spreadsheet developed in part A above, determine what effect the proposed changes will have on the company’s after-tax operating income. (Hint: Do not develop another spreadsheet.) Would you recommend that Razr-Tech implement the proposed strategy?

End of Question One

Ponderosa Manufacturing Ltd produces a single product known as Thingamajig. The Thingamajig has limited demand, which means that even if Ponderosa produces more, they are not able to sell more of the Thingamajig. At present, demand for the Thingamajig is 2,000,000 units per year. Cost information for the Thingamajig for the current year is as follows:

Selling Price$185per unit
Manufacturing costs  
Direct materials$25per unit
Direct labour$64per unit
Variable overhead$32per unit
Fixed overhead$60,000,000per year
Marketing costs  
Variable$4per unit
Fixed$25,500,000per year
ACCT2002 Value Analysis for Decision Making

The tax rate for Ponderosa Manufacturing Ltd is 30%.

REQUIRED:

*All workings must be shown*

  1. Calculate the net profit for Ponderosa for the current year.
  • Ponderosa is not operating at capacity and thus is considering adding a new product to its range. The new product is Whatchamacallit. If Ponderosa decides to produce the Whatchamacallit, it will have to reduce Thingamajigs current production by 400,000 units. Demand for Whatchamacallit is expected to be 800,000 units. Production of Whatchamacallit will not have an impact on fixed overhead and marketing costs. Variable marketing costs will still have to be incurred for the Whatchamacallits and will remain the same. Cost information for the Whatchamacallit is as follows:
Selling Price$250per unit
Manufacturing costs  
Direct materials$75per unit
Direct labour$96per unit
Variable overhead$48per unit
ACCT2002 Value Analysis for Decision Making

Calculate the new net profit for Ponderosa if it decides to produce Whatchamacallit together with Thingamajig. Advise Ponderosa if they should go ahead with their plan to introduce Whatchamacallit. Explain the reasons behind your advice.

  • Apart from Whatchamacallit, Ponderosa is also considering a third product to add to its product line, a Whosawhatsit. Ponderosa believes that if all three products were sold together total net profit would increase to $36,000,000, and this would require no increase in fixed overhead, fixed marketing costs nor variable marketing cost. Additionally, if all three products were sold together, Ponderosa expects that 50% of the sales would be of Thingamajig, 20% would be of Whatchamacallit and 30% would be of Whosawhatsit. Costs information for the Whosawhatsit is as follows:
Selling Price$220per unit
Manufacturing costs  
Direct materials$62per unit
Direct labour$42per unit
Variable overhead$64per unit
ACCT2002 Value Analysis for Decision Making

Determine for Ponderosa how many units of each product must be sold in order for them to achieve a net profit of $36,000,000.

  • Assume that the sales mix has changed to Thingamajig 30%, Whatchamacallit 50% and Whosawhatsit 20%. Without re-calculating anything, explain what would happen to net profit and why.

End of Question Two

Keller Technology produces specialised machinery customised to their clients’ need. Barings Systems had ordered a custom machine five months ago and paid a 5% deposit on the $275,000 machine. The cost of producing the machine for Barings are as follows:

Direct materials ……………………………………….……                 $63,400 Direct labour ………………………………………………..                  $57,600 Manufacturing overhead applied:

Variable ……………………………………         $28,800

Fixed ………………………………………..     $14,400                 $43,200 Fixed selling and administrative costs ……………                       $16,420 Total …………………………………………………………            $180,620  

Just as Keller completed producing the machine, Barings went into receivership. As Barings was unable to pay for the machine, the deposit paid to Keller was forfeited. Keller is now considering the options available to them, with regards to the machine that Barings had ordered. The production manager has identified three options for Keller.

Option A: Pegasus Engineering is willing to buy the Barings’ machine if it can be re- worked to Pegasus’ specifications. The re-worked machine will be sold to Pegasus as a special order for $231,900. The additional identifiable costs to re-work the machine to Pegasus’ requirements are as follows:

Direct materials ……………………………$19,400
Direct labour ………………………………..  $13,200  
Total …………………………………………  $32,600  
ACCT2002 Value Analysis for Decision Making

Option B: It is possible to convert the Barings machine into a standard machine that Keller can normally sell for $199,375. However, as this is a conversion of a custom machine, a 4% discount will be offered to attract a buyer. In order to complete the conversion, Keller will need to incur the following costs:

Direct materials ……………………………$7,880
Direct labour ………………………………..    $9,400  
Total ………………………………………..  $17,280  
ACCT2002 Cost Analysis for Decision Making

Option C: Keller will sell the machine in its current completed state for $185,000.

The following information is available regarding Keller’s operations:

  • The allocation rates for the manufacturing overhead and fixed selling and administrative costs are:

Manufacturing costs:

Variable………………………………………………. 50% of direct-labour costs

Fixed……………………………………………………. 25% of direct-labour costs

Fixed selling and administrative costs………………………. 10% of the total of direct-

material, direct-labour, and manufacturing overhead costs.

  • The sales commission rate on sales is 3 percent.

REQUIRED:

  1. Determine the dollar contribution each of the three alternatives and choose which option is best (financially) for Keller. Show all workings.
  • If Pegasus makes Keller a counteroffer, what is the lowest price Keller should accept for the reworked machinery from Pegasus? Explain your answer.

End of Question Three

Aqua Aztec (AA) is a manufacturer of stand-up paddleboards (SUPs) and produces four different models: Beast, Monster, Vapor and Coral. In addition to the four models of SUPs, AA also produces a maintenance kit for the SUPs. Demand for the SUPs is increasing and management has requested your help in determining the best sales and production mix for the next year. The company has provided you with the following data:

  ProductDemand next yearSelling Price per unitDirect materialsDirect labour
Beast4,800$750.00$525.00$84.00
Monster5,900$660.00$520.00$60.00
Vapor6,200$620.00$425.00$86.40
Coral6,850$550.00$415.00$72.00
Maintenance Kit75,000$150.00$62.00$43.20
ACCT2002 Cost Analysis for Decision Making

The following additional information is available:

  • The company’s plant has a capacity of 200,000 direct labour hours per year on a single-shift basis. Due to the tight labour market, this cannot be increased. The company’s current employees and equipment can produce all five products.
  • The direct labour rate is $24.00 per hour; this rate is expected to remain unchanged during the coming year.
  • Fixed costs total $2,580,000 per year. Variable overhead costs are $16.00 per direct labour-hour.
  • All of the company’s nonmanufacturing costs are fixed.
  • The company’s present inventory of finished products are negligible and can be ignored.

REQUIRED:

  1. Determine whether Aqua Aztec has sufficient labour hours to satisfy demand for next year. Show all workings and explain your answer.
  • Determine the production plan for the company that maximises its income. Show all workings and explain your answer.

END OF WORK COMPILATION QUESTIONS

Visit:https://auspali.info/

Also visit:https://www.notesnepal.com/archives/767