Accessed Sheet of Online Bank Sheet

Question: Describe about the Report for Accessed Sheet of Online Bank Sheet. Answer: 1. The Operating profit of power drill product for the last twelve months computed from the data provided is given below: Sales 20000 selling price $130 Revenue $26,00,000 Variable manufacturing cost $50 Variable cost $10,00,000 Fixed Manufacturing costs $4,00,000 Variable selling and administrative costs $30 Variable selling and administrative costs $6,00,000 Fixed selling and administrative costs $3,00,000 Operating Profit $3,00,000 Profit margin 11.5% The company is evaluating various courses of actions in order to increase the profitability of the product. The profitability of each of the three proposals is presented below: Proposal 1 Suggestion increase in sale price by $10 with additional expenditure on national advertising of $125,000 in order to maintain the sales volume. Sales 20000 selling price $140 Revenue $28,00,000 Variable manufacturing cost $50 Variable cost $10,00,000 Fixed Manufacturing costs $4,00,000 Variable selling and administrative costs $30 Variable selling and administrative costs $6,00,000 Fixed selling and administrative costs $4,25,000 Operating Profit $3,75,000 Profit margin 13.4% Proposal 2 Suggestion increase the variable cost by $5 to improve quality of the product along with an advertising campaign costing $50,000 which will lead to an increase in sales of 25% Sales 25000 selling price $130 Revenue $32,50,000 Variable manufacturing cost $55 Variable cost $13,75,000 Fixed Manufacturing costs $4,00,000 Variable selling and administrative costs $30 Variable selling and administrative costs $7,50,000 Fixed selling and administrative costs $3,50,000 Operating Profit $3,75,000 Profit margin 11.5% Proposal 3 Suggestion a decrease in selling price of the product by $10 in the first three months from April to June which will lead to an increase in the units sold by 4000. Thereafter, the selling price will be as the original. An advertising campaign costing $40000 to be launched. Contribution margin for first three months Sales 10000 selling price $120 Revenue $12,00,000 Variable manufacturing cost $50 Variable cost $5,00,000 Variable selling and administrative costs $30 Variable selling and administrative costs $3,00,000 Contribution Margin $4,00,000 Contribution margin for the next 9 months Sales 14000 selling price $130 Revenue $18,20,000 Variable manufacturing cost $50 Variable cost $7,00,000 Variable selling and administrative costs $30 Variable selling and administrative costs $4,20,000 Contribution Margin $7,00,000 Operating Income Total Contribution margin $11,00,000 Fixed Manufacturing costs $4,00,000 Fixed selling and administrative costs $3,40,000 Operating Income $3,60,000 Profit margin 11.9% Analysis of the three proposals Proposal Operating profit margin Original 11.5% Proposal 1 13.4% Proposal 2 11.5% Proposal 3 11.9% From the above table, we see that proposal 1 has the highest profit margins. However, it may not be the best option. This is because an increase in the price of the product normally does not go well with the consumers. Even an added advertising may not attract them to the product as the product is expensive. The increased price may offer higher profits but with an increase in the price, the quantity sold may go down. Hence, this proposal may rather work negatively for the company. Proposal 2 does not offer any increase in profit margins. Moreover there is an assumption that the sales volume may increase by 25% as a result of improved product quality and advertising campaign. But 25% is quite huge and unrealistic. Since, the proposal does not offer any additional margins; it is not advisable to go ahead with the proposal. Proposal 3 offers a slight increase in the profit margins. This proposal looks more realistic as it is based on a reduction in price. Price has the highest elasticity when it comes to quantity demanded. With a fall in price, there are high chances that the demand for the products would increase. Moreover, an advertising campaign launched before the reduction in price will make the consumers aware of the product and a sudden fall in price thereafter will motivate them to buy the product. Therefore it is recommended that the company should go ahead with the proposal 3 of reducing the price by $10 in the first three months and maintaining t at the original thereafter. 2. The budgeted income statement of Tassie Company is presented below: Per unit Total Sales 150000 Selling price $15.0 Revenue $22,50,000 Direct Material $2.5 $3,75,000 Direct labour $3.0 $4,50,000 Variable factory overhead $1.5 $2,25,000 Fixed factory overhead $2.0 $3,00,000 Variable selling and administrative cost $2.0 $3,00,000 Fixed selling and administrative cost $1.5 $2,25,000 Total cost $18,75,000 Operating Income $3,75,000 a) Capacity of the company is 200000 units per year The government bid is for 40000 units and the budgeted unit is 150000, so a total 190000 units will have to be produced which are within the capacity of the company. The income statement for 190000 units is presented below: Sales 190000 Sale price $15.0 Revenue $28,50,000 Direct Material $2.5 $4,75,000 Direct labour $3.0 $5,70,000 Variable factory overhead $1.5 $2,85,000 Fixed factory overhead $3,00,000 Variable selling and administrative cost $2.0 $3,80,000 Fixed selling and administrative cost $2,25,000 Total cost $22,35,000 Operating Income $6,15,000 A bid of 40000 units should be made. b) Capacity of the factory is 180000 units In this case, only 30000 units can be produced additionally on the basis of capacity of the company. The income statement for the 180000 units is presented below: Per unit Total Sales 180000 Selling price $15.0 Revenue $27,00,000 Direct Material $2.5 $4,50,000 Direct labour $3.0 $5,40,000 Variable factory overhead $1.5 $2,70,000 Variable selling and administrative cost $2.0 $3,60,000 Fixed factory overhead $3,00,000 Fixed selling and administrative cost $2,25,000 Total cost $21,45,000 Operating Income $5,55,000 The bid should be of 30000 units 3. No, salary and depreciation cannot be regarded as an asset on the balance sheet. Salary is paid to an employee of the organisation. An item is recorded in the balance sheet as an asset if it can be measured and sold and there is a past transaction involved like purchase of asset. Since the employees cannot be purchased or sold, the salary paid to them cannot be regarded as an asset. There is no transaction involved in hiring an employee unlike an asset like plant machinery. Salary is treated an expense in the income statement for the period for which the services of the employees are taken. However, in case a salary is paid in advance to the employees, it appears in the balance sheet as a prepaid expense. (Back, 2010) Depreciation is the reduction in the value of an asset over a period of time. Depreciation is reported an expense in the income statement for the period to which it relates to. Accumulated depreciation is the total depreciation charged to the asset till date. It appears in the balance sheet and is a contra asset. It cannot be regarded as an asset because the value stores in the accumulated depreciation do not produce any economic value to the company in the future. It is the economic value that has been consumed. It cannot also be considered a liability because it does not represent any obligations of the company to be paid for. Hence accumulated depreciation is a contra asset and appears as a negative balance under the asset to which it relates to. 4. Overhead allocation rate for labour intensive process Indirect costs $98,400 Direct labour hours 25795 Overhead allocation rate $3.8 Total costs of the special order No. of trailer 350 Direct material $33,810.0 Direct labour $17,780.2 Machine Hours $6,667.6 Indirect costs $1,335.1 Total cost $59,592.9 Working Notes a) Direct labour cost per trailer The budgeted direct labour cost and the direct labour hours have been used to calculate the cost of labour per unit. $327,600 / 25,795 = $12.7 b) Machine cost per trailer The budgeted labour cost per trailer has been used to calculate the machine cost for the special order 12.7 * 525 = $6,667.6 c) Indirect costs Overhead rate * no. of trailers = 3.8 * 350 = $1,335.1 Cost of special order with machine hours as indirect cost allocation base Indirect costs $98,400.0 Machine hours 9840 Overhead allocation rate $10.0 Cost of special order No. of trailer 350 Direct material $33,810.0 Direct labour $17,780.2 Machine Hours $6,667.6 Indirect costs $3,500.0 Total cost $61,757.8 Minimum price per trailer Minimum price Cost per unit Labour hours allocation base $170.27 Machine hours allocation base 176.4507 Under a segmented overhead cost pool, the overheads are grouped into one cost pool and these costs are allocated to the different products using a predetermined overhead rate. A company may also choose to make several cost pools for each function like assembly, packaging, quality control etc. and allocate the overhead costs of each pool to the products using a different overhead rate for each pool. This will yield more accurate results and will help in a more accurate pricing. Activity based costing is a process under the overheads are allocated to the products on the basis of their usage of the overhead. There are two steps under ABC, first is to identify various activities undertaken with regard to the product like assembly, transport, packaging, labelling, etc. The total cost of each activity is determined and then on the basis of the usage of the activities by the product, the overhead costs are assigned to the products to arrive at the total product cost. This is a more accurate way of determining the price of the product as the overheads are allocated on a rational basis and products using more of the expensive activities are allocated higher costs and vice versa. (CIMA, 2008) References Back, L., (2010), The Most Important Assets are not on the Balance Sheet, accessed online on 9th September, 2016, available at https://www.triplepundit.com/2010/09/the-most-important-assets-are-not-on-the-balance-sheet/ CIMA, (2008), Activity Based Costing, Topic Gateway Series No. 1, accessed online on 9th September, 2016, available at, https://www.cimaglobal.com/Documents/ImportedDocuments/cid_tg_activity_based_costing_nov08.pdf.pdf