ACC202 Management Accounting-Manufacturing Costs

Given Information

Manufacturing costs

Direct material $4.00 per unit

Direct labour $2.00 per unit

Variable overhead $0.80 per unit

Fixed overhead $10,000

Marketing costs

Variable $0.50 per unit

Fixed $15,000

Calculation of monthly profit during a summer month when all 40,000 boxes produced in a month are sold

Acceptance / Rejection - Yes, this offer can be accepted because it leads to a profit of $500 in first month and for the following month the profit will be $1,500. And further, the company is not required to incur additional cost in terms of capacity enhancement, as the company is already having an extra capacity of upto 10,000 boxes per month in the month of autumn and winter and this offer requires 5000 boxes in the month of autumn and winter only. So, for this offer, the company is not required to incur any additional fixed cost. Other factor which needs to be considered are as follows:

• Additional support staff– Company may incur some additional expenses on indirect expenses like support staff in accounting to maintain accounting related to this offer. Additional support staff may be required for delivery of products to the client. In this case, this expenses needs to be taken into consideration before calculating the profitability.
• Availability of Raw Material– If the additional raw material is available in the market at the same price, there is no problem. However, if the price of raw material goes up with the increase in demand for raw material, company may have to revise its calculation for this offer.
• Availability of labour– If the additional labour is not available at the existing price, company may need to reconsider this offer before acceptance. If there is no shortage of labour at existing price, this offer should be accepted.
• Additional working capital requirement– This new offer may require additional working capital. If the company giving the offer is providing advance payment, then no additional working capital may be required.
• Effect on existing business sales– Company needs to consider any effect this new offer will have on existing sale of product. Existing sale of company may reduce as the company giving the offer may be purchasing the product currently in open market.

Another request has come in the form of a long term government contract which wants the company to supply 10,000 boxes within the country per month for $8 per box. Analysis of this Long term government contract is given below:

Acceptance / Rejection (assuming no capacity expansion) - This offer should be accepted as the per box cost of production is $6.80 apart from its fixed costs and marketing costs and the government is offering $8 per box. Meaning thereby the company will have a profit of $1.20 per box per month on 10,000 boxes in total a profit of $12,000. So, this offer can be accepted.

Acceptance / Rejection (assuming capacity expansion) - As this is a long term contract, it is further assumed that the company is having excess capacity and does not require any further fixed costs or capacity expansion costs and will have a profit of $12,000. However, if the capacity needs to be increased, it will increased the fixed cost for the company. However, the company is having excess capacity in the month of autumn and winter but for the months of summer and spring, the company is already producing 40,000 boxes. So, in case of capacity expansion, it is assumed that the fixed overhead will increase in same proportion. So, the cost per set will be $7.05. In this case, the company will earn a total profit of $9,500. So, this offer can be accepted from this point of view as well.

A request has come from an outside supplier to supply 8,000 boxes of fruit year round(each month) for a price of $7.80 per box. The Citrus Company would incur additional freight costs of $0.20 per box but no other additional costs. Again, this offer as well will have two alternatives, one is if assumed that the company is already having additional capacity and another if capacity is to be increased. Analysis of this offer.

Acceptance / Rejection (assuming no capacity expansion) - This offer should be accepted as the per box cost of production is $7.00 apart from its fixed costs and marketing costs and the supplier is offering $7.80 per box. Meaning thereby the company will have a profit of $0.80 per box per month on 8,000 boxes in total a profit of $6,400. So, this offer can be accepted.

Acceptance / Rejection (assuming capacity expansion) – Now, in this case, it is assumed that the company is not having additional capacity and thus require to incur fixed costs as well. Further, it is assumed that the fixed costs will increase in the proportion of units only. And in this case, as well, the company will have an profit of $4,400 per month on sale of 8000 boxes. So, this offer can be accepted.

The Citrus Company has an offer to rent out its property to the government so that affordable housing can be built. The government would pay the Citrus Company $60,000 per month ,assuming it would use the property on an ongoing basis. So, in this case the company will have a profit or income of $60,000 per month.

Now, another option with the company is to continue producing the boxes, i.e. 40,000 boxes in Spring and Summer months and 30,000 boxes during Autumn and Winter months.

Profit during Autumn and Winter month

So, the company will earn a profit of $63,000 in the month of Summer and Spring and $41,000 in the month of Autumn and Winter. Yearly profit for the company under its production will be $624,000 (assuming each season remain for 3 months).

So, the offer of government should be accepted, as this offer is profitable in the month of summer and springs when the company will earn $41,000 from its regular production and government will give $60,000. But during the month of autumn and winter the company will earn more on its own production by $3000 rather than government offer. But if we look in totality, the government is supposed to give $60,000 per month meaning thereby $720,000 yearly whereas the own production of company will give $624,000 yearly. So, the government offer will give additional $96,000. So, this offer sho