To,
The Director of Bonza Handtools Limited,
Date: 20/1/2018
Subject: Three Provided Alternatives Assessment
Respected Sir/Madam,
The following discussion shows the advantages and effects of provided alternatives in the company:
Alternative One
As per the accountant, the selling price needs to be $140 for raising the profit margin. As per the above table, the rise of revenue from $300000 to $375000 will fetch $75000 profit. For this profit, advertisement expenses worth $125000 needs to be incurred that will increase the business risk.
Alternative Two
As per the production manager, the overall product quality will be improved by the rise in sales volume by 25% and variable cost by $5 per unit. The contribution margin of the company will be decreased due to the increase in variable cost. In addition, lower advertisement cost will fetch additional profit worth $75000 (Demski, 2013).
Alternative Three
It is required for the company to make an expenditure of $40000 on advertisement for making a profit of $60000. Thus, this proposal can contribute to loss of customer as they can consider the decline in product quality due to decline in price (Demski, 2013).
Based on the above discussion, it is recommended to the directors of the company to implement the proposal of production manager for increasing its overall revenue.
In this case, the profit margin can be increased with the use of overall capacity. Thus, as per the above table, $10.80 is the selling price of the products of Tassie Company and it can be obtained by adding variable cost, fixed cost and mark-up of 20% on cost price (Warren & Jones, 2018).
The current production level is 150000 units per year. Thus, in order to accept the government contract, the company needs to compromise 10000 units and a profit of $2.50 per unit. Thus, for the extra units, the cost will be $13.30 per unit and the average price for 40000 units is $11.43 (Edmonds et al., 2016).
Business organizations become able to take suitable decisions in cost structure in order to increase profit with the help of activity-based costing and segmented overhead cost pool. Under activity-based costing, the identification of direct cost specific department is done along with the commutation of projected departmental hours (Vanderbeck, 2012). The cost pool indicates towards direct cost. Thus, competitive pricing structure contributes to increased profit margin.
The segregation of overhead provides major advantage in the determination of cost that cannot be revealed in the normal course of business at the time of estimating overhead costs and close association can be seen between them (Ward, 2012). The understanding about the most profitable business segment can be obtained from the allocation of income and expenses in the production departments. On the contrary, effectiveness in overhead cost can be seen in the presence of the consecration on a single product and this aspect allows the managers in anticipating the profit margin of products. The organizational accountants have the ability for the detection of overhead that can contribute towards negative or positive effect on the profit level. Overhead costs can be divided into various heads of expenses for the determination of individual job or cost of service (Banerjee, 2012). The following example shows some of the examples:
|
Variable Overhead |
Administration Overhead |
Indirect Overhead |
Manufacturing Overhead |
|
Utilities of equipment, production supplies, wages for the management of materials |
Office supplies, front office expenses, commission paid, commission paid, legal cost, external audit cost, selling expenses, administrative expenses, lease expenses, sales officer salary (Cadez & Guilding, 2012) |
Telephone expenses, office expenditure, research and development costs, administration salaries, audit fees, accounting fees, legal expenses |
Rent for factory, salary for managers, salary for maintenance staffs, payment of property tax, payment for factory utilities, wages for janitorial staffs (Cadez & Guilding, 2012) |
Instances can be used for the explanation of overheads. For example, a computer system has been made in the Melbourne Private Hospital for the fixing of the time of treatment and utilization of this system can be seen in the nurse station. It needs to be mentioned that the organization uses to record all the costs in a systematic manner as per the duration of the patients in the hospital. In this process, different relative costs are considered; they are bed fees, medicines, meals for the patients and expenses for X-ray. After the recovery of the patients, the hospital authority uses to provide the patients with the bills for doctor’s fees, medicines expenses, and other direct and indirect costs. Thus, it can be seen that the hospital use to present the costs in an effective manner with the assistance of subsidiary ledger that includes the episode number and the medical number of the patients (Drury, 2013).
An Australian manufacturing organization, Redmond Gary, does the allocation of labor hours for the accurate cost allocation in the employees for the generation of costs that are expected to incur by the organization. In addition, it is the responsibility of the accountants for the maintenance of labor hours and direct costs to the employees. It becomes possible for the identification of accurate amount of cost need to be incurred with the process to distribute distinct services and jobs (Cadez & Guilding, 2012). This process provides great assistance in making decisions for the pricing policy. With the distribution of costs in different services and jobs, it becomes possible for the tracking of total cost of each department.
References
Banerjee, B. (2012). Financial policy and management accounting. PHI Learning Pvt. Ltd..
Cadez, S., & Guilding, C. (2012). Strategy, strategic management accounting and performance: a configurational analysis. Industrial Management & Data Systems, 112(3), 484-501.
Demski, J. (2013). Managerial uses of accounting information. Springer Science & Business Media.
DRURY, C. M. (2013). Management and cost accounting. Springer.
Edmonds, T. P., Edmonds, C. D., Tsay, B. Y., & Olds, P. R. (2016). Fundamental managerial accounting concepts. McGraw-Hill Education.
Vanderbeck, E. J. (2012). Principles of cost accounting. Cengage Learning.
Ward, K. (2012). Strategic management accounting. Routledge.
Warren, C. S., & Jones, J. (2018). Corporate financial accounting. Cengage Learning.
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