Analysis Of Three Proposals For Sales And Revenue Increase

Solution 1

A report hereunder is presented that shows a brief  analysis of the given three proposals.

The company presently has three proposals, to increase the overall sales and revenue. The fixed costs are same in all the proposals, there are changes in the sales volume and the sale price respectively. Analysis is done to ascertain what are the quantitative strength and weakness of all the proposals. In addition, how they are fruitful for the organisation. The various concepts of decision-making and relevant cost are taken into consideration for the analysis of the proposals.

After calculating the quantitative figures in all the cases, we can say that proposal 1 is most profitable and proposal 2 is the least profitable.  In case of proposal 1, the sale volume is not dropping and also the sale price per unit is increasing. (Charlton et al. 2017) These are the strength that is associated with this proposal. If we analyse rationally, since the advertisement cost is increasing, the overall profit that the company will earn will be more or less same like before. Because with every increase in the sales price, the advertisement cost is also increasing. There is  a scenario of no profit and no loss in this case (Annema et al. 2017).

In proposal 2, the sales volume is increasing, but there is no increase in the sales price. Moreover the overall cost related to advertisement is also increasing. This is not profitable for the company as can be deciphered form the quantitative analysis. With increase in the sales volume, the variable cost of production is also increasing and since there is no effective increment in the overall sales price, the company is incurring a loss. Thus that is the main drawback of this proposal (Shull 2017).

In proposal 3, the company is going for a different method of giving rebates to increase the overall sale. This is a smart move, but with increment in the sales volume, the volume of production is also increasing for the company. This is thus causing a negative impact on the profit that is earned by the company. But if we analyse rationally, if the sales volume increases with increment in the total sales, the company will eventually gain as can be seen from the quantitative analysis of the proposal (Wachs 2017).

Conclusion

Thus, we see that the three proposals have their own strength and weakness.  The concept of relevant costing and decision making plays an important part in analysing them, and helps the company in selecting the best that is suited to their requirements and all the other factors that might affect the profit prospects of the company are taken into consideration. It is not always that the proposals that gives the most amount of return is the best, other factors like the total cost, opportunity cost, the management decision making capabilities, all plays an important role in deciding the success of given proposal for any company.

So, thus as its has been mentioned in the notes given in the same, in each case the company will make a bid keeping in thought the amount of profit that the company will eventually earn. In case A, when the capacity level is 200000 units, the price of additional units (40000) of production is the relevant cost, because there is sufficient spare capacity. The bid price will be $7 per unit, based on the calculations done above. In the second case the company have only 180000 spare capacities, if they accept the offer then they has to produce 10000 less unit of their regular production, by reducing the regular production, for which there will be a contribution loss per unit  $8. The bid price will be $15, variable cost is $7 and the lost contribution will be charged from the party that is $8, so the bid price will be $15 per unit. (Linden & Freeman 2017)

Calculation of Normal Profit

Most of the time, these costs are treated as expenses and are shown in the income statement. However, in some particular cases, these costs can be shown on the asset side of the balance sheet even though they are expenses. The three cases are explained here under-

• First, if these costs are part of the manufacturing cost then they can be shown on the asset side of the balance sheet. In case of manufacturing costs, these expenses are accumulated, until the goods with which these costs are associated are not sold.  Therefore, in case some of the units are not sold, then these costs may be reflected on the asset side of the balance sheet as a part of the finished good or the work in progress that is standing at the end of the accounting period.
• If the business is preparing its books on accrual basis then the expenses that are paid before they are accrued, are reflected on the asset side as prepaid expenses. Thus in this way even though these costs are expenses they become a part of the balance sheet on the asset side.
• In case of depreciation, it can be treated in many ways, if it is accumulated over the years, then it can be shown as a deduction from the fixed assets in the asset side of the balance sheet.

Examples to show some expenses that can be component of the asset side are prepaid rent, over applied depreciation, salaries advances etc.

Indirect material: – varied with output

Indirect Labour: – output/Labour working hours

Indirect expenses: – Varied with labour working Hours

In the absence of any instruction  regarding the breakup of variable overhead we should presumed  variable overhead consist indirect expenses only. So in the given case for the calculation of total cost of special order we should presumed that indirect cost should be allocated on the basis of labour hours (Baal, Meltzer & Brouwer 2016).

5. Activity based costing and overhead costs pools can help in accurately determine the price of the products, by focussing on the cause and effect relationship. . So while allocating the cost focus should be on the activities because of which the costs has been incurred.  It helps in allocation of large costs smoothly between the different cost centres, taking specific activities as the basis of cost allocation and distribution(Zhuang & Chang 2017)It helps in providing necessary information about the different cost behaviour.  It helps in getting a trace about the various activities that might have led to more cost. It helps in abolishment of unnecessary cost. In case of overhead allocation based on the cost pool, allocation is done based on labour hour between the various heads, if there are no specific criteria for cost classification and distribution is given. It is one of the most commonly used methods of cost classification. It helps in ascertaining the right price of particular product. In this ways, these methods help in accurate pricing of a product (Treville, Cattani & Saarinen 2017).

Annema, JA, Frenken, K, Koopmans, C & Kroesen, M 2017, ‘Relating cost-benefit analysis results with transport project decisions in the Netherlands’, Letters in Spatial and Resource Sciences, vol 10, no. 1, pp. 109-127.

Baal, PV, Meltzer, D & Brouwer, W 2016, ‘Future Costs, Fixed Healthcare Budgets, and the Decision Rules of Cost-Effectiveness Analysis’, HEALTH ECONOMICS, vol 25, no. 2, pp. 237-248.

Charlton, PC, Ilott, D, Borgeaud, R & Drew, MK 2017, ‘Risky business: An example of what training load data can add to shared decision making in determining ‘acceptable risk’’, Journal of Science and Medicine in Sport, vol 20, no. 6, pp. 526-527.

Linden, B & Freeman, RE 2017, ‘Profit and Other Values: Thick Evaluation in Decision Making’, Business Ethics Quarterly, vol 27, no. 3, pp. 353-379.

Shull, R 2017, Rush to Policy: Using Analytic Techniques in Public Sector Decision Making, Routledge, New York.

Treville, SD, Cattani, K & Saarinen, L 2017, ‘Technical note: Option-based costing and the volatility portfolio’, Journal of Operations Management, vol 49-51, pp. 77-81.

Wachs, M 2017, Ethics in Planning, Routledge, NEW YORK.

Zhuang, ZY & Chang, SC 2017, ‘Deciding product mix based on time-driven activity-based costing by mixed integer programming’, Journal of Intelligent Manufacturing, vol 28, no. 4, pp. 959-974.