ACC202 Introduction to Management Accounting of Manufacturing

Answer a.

The following table shows the profit that a company may have when it produces and sell 40000 boxes.

The above table shows that the company will earn a profit of 63000 after deducting all the variable and the fixed expenses relating to production and distribution (Alex, 2012).

Answer b.

Citrus company got an option to sell 5000 boxes at a price which is lower than the normal selling price prevailing at that time (Ball, 1984). An extra variable expense of freight and fixed overhead has to be incurred for its production. So, the company determines the profit/ loss as follows:

The company will incur the loss of 27000 if it sells fruits overseas. However, earning profits is not the only objective of the company. There are many other factors that a company looks upon before it takes a decision. The company may still accept the offer although there are losses to expand its market as it may happen that it may not give any benefit right now but it may have good returns in the future. It is also possible to maintain a balance between demand and the supply. There may arise a situation when the demand of his fruits are not stable in his own country and it is beneficial to recover some cost by selling it at a lower price rather than recovering nothing at all (Berman, Knight, & Case, 2013).

Answer c.

Citrus company has been requested by the government to enter into a long term contract. So the company before taking its decisions analyses the benefits and losses in accepting the offer by doing necessary calculations both on monthly and annual basis (Berman, Knight, Case, & Berman, 2008).

The company should accept the offer because it may not be beneficial for the short run but it will help the company to earn a profit of 50000 yearly (Cafferky, & Wentworth, 2010)..

Answer d.

The company will accept the offer after analysing the total cost as well as the profits on the monthly as well as annual basis (Berman, Knight, Case, & Berman, 2008). To understand it better, that the company should accept the offer or not the following calculations are made-

The company sees that after incurring all the variable cost and fixed cost if the company sells 8000 units for $7.8 then it will have loss for a particular month but on the annual basis the company will earn a profit of $3800 (Bragg, n.d.).

Answer e.

The citrus company is able to sell 70000 boxes of fruits in the entire year at $9.5 per box. It has to incur certain variable and fixed expenses to make it ready for sale. It is very important for the company to know if the company is incurring losses or earning profits. If the company is incurring losses then it is obvious that the company should let out his property to government. It should also let out his property if his monthly income is less than 60000 .

The company earns a profit of 129000 annually whereas if the company gives its property on rent to the government then it will be able to earn rental income of (60000*12) = $720000. Therefore, as per the above calculations the company should accept the offer of letting its property on rent.

References:

Alex, K. (2012). Cost accounting (1st ed.). Chennai [India]: Pearson.

Ball, W. (1984). A sense of direction (1st ed.). New York: Drama Book Publishers.

Berman, K., Knight, J., & Case, J. (2013). Financial intelligence (1st ed.). Boston, Mass.: Harvard Business Review Press.

Berman, K., Knight, J., Case, J., & Berman, K. (2008). Financial intelligence for entrepreneurs (1st ed.). Boston, Mass.: Harvard Business Press.

Bragg, S. Corporate cash management (1st ed.).

Cafferky, M., & Wentworth, J. (2010). Breakeven analysis (1st ed.). New York: Business Expert Press.