Cost Calculation And Production Decisions For Playdough Company

Calculating the Cost per Canister

Answer a.

The playdough company is manufacturing a canister which involves different costs. The cost involves both variable cost and fixed cost. Cost per unit is calculated by dividing total cost by number of canisters (Berman, Knight and Case, 2013).

Manufacturing (cost per unit)
Particulars Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Amount
Direct material	300000
Direct labour	180000
Variable overhead	120000
Fixed Overhead	540000
Total cost	1140000
Number of canister	760000
Cost per canister	1.5

Answer b.

The company in the present situation produces 760000 canisters every year and the entire production is sold. Recently, the company has got an offer from an outside to but the canisters from outside. Let us first take the decision on the basis of financial factors which is profitability. We will have to compare the profits of in-house manufacturing and the profits if the canisters are bought from outside (Bragg, 2014). The reduction in the total cost will obviously increase the profits.

From the given two tables we can easily see the difference in the profits earned by the company:

Calculation of profit (manufacturing)
Particulars	Amount
Sales	1672000
Less: Direct material	300000
Direct labour	180000
Variable overhead	120000
Fixed overhead	540000
Profit	532000

Calculation of profit (purchase)
Particulars	Amount
Sales	1672000
Less: Direct material	300000
Direct labour	180000
Variable overhead	120000
Fixed overhead	432000
Profit	640000

We can observe that the fixed overhead in the case of outsourcing is reduced as there is a reduction in the machinery depreciation by $28000 and supervisor’s salary by $80000 which has led to increase in profits because the selling price in both the cases has been maintained at 2.2.

There is an increase of profits by (640000-532000) = 108000. Hence, it is now easy to draw a conclusion that the management in consideration of financial factors should accept the order.

Answer c.

A company initially tries to retrieve the variable costs experienced by it and then it hopes to reclaim the fixed costs.

It is necessary for us to compute the contribution, which can be calculated by withdrawing the value of variable cost from the sales figure. 

The value of variable cost is influenced by the amount of production on the other hand when the fixed costs are persistent and there is no effect even if the production level is an increased or decreased. To take this decision, we must carefully compare and analyze the contribution of normal sales and also the contribution of special orders (Brigham and Ehrhardt, 2017).

The contribution of the company is more presentable when it is higher because this shows the company’s ability to recover the fixed cost.Also in the process, we come to know that special order profit will be lower because the contribution to recover the fixed cost is really very low (Gitman and Zutter, 2012). Still, the following working will make it much easier to understand that why the company should refuse the special orders

Profitability Analysis: Manufacturing vs. Purchasing Canisters

Calculation showing profit after neglecting the acceptance of the special order:

	Amount
Sales	1672000
Less: Direct material	300000
Direct labour	180000
Variable overhead	120000
Fixed overhead	540000
Profit	532000

Calculation showing profit after the acceptance of special order:

Particulars	Amount
Sales	1656000
Less: Direct material	300000
Direct labour	180000
Variable overhead	120000
Fixed overhead	540000
Profit	516000

The playdough company’s maximum total capacity is 760000 units. So, if the company will accept the special orders, then it will be selling 20000 units at 1.4 and the remaining 740000 units at 2.2. Thus, there will be a terminal impact on the company’s profit, which is observed because of the result of fall in the sales price (Hoyle, Schaefer and Doupnik, 2015).

So, according to my study, the company should not take the special order.

Answer D:

It is clearly stated in the above solution in the part c that companies should refuse to accept any special order on the basis of its financial position. However, thinking of making profit is not always the main agenda. Sometimes companies should take some decisions based on other factors also. To make money in the future, we need to sacrifice the profit for a short period of time. The acceptance of this offer may improve the relationship of the company with its client, which may prove to be profitable both financially and for the company’s reputation. Also, there are many opponents in the market who may accept the proposal and provide satisfaction to the customers which will result in the set back of the company and hence it will not be able to compete with its opponent and also will no longer be able to meet the requirements of the industry (Ehrhardt and Brigham, 2011).

Answer E:

The Playdough Company is currently having production and sales of 760000 canisters every year which helps it to gain profits worth 532000, as shown below. The company proposes to produce 400,000 coffee cups every year which results in a small profit of 60000 only.

Calculation of profit (manufacturing)
Particulars	Amount
Sales	1672000
Less: Direct material	300000
Direct labour	180000
Variable overhead	120000
Fixed overhead	540000
Profit	532000

Profit on sale of coffee cups (per unit)
Sales:	1.2
Less: Direct material	0.6
Direct labour	0.2
Variable overhead	0.1
Fixed overhead	0.15
Profit on sale of coffee cups (per unit)	0.15
Profit on 400000 cups	60000

Hence it is clearly stated in the calculations that the company’s production of canisters should continue. Also there is a possibility that the company may be able to increase its profits. If the company creates only the canisters and abandons the idea of ??making coffee cups, it will start earning profits amounting to 532000. The company also has a different option of producing the coffee cups and buying the canisters from outsiders which will be helping the firm to maximize profit (Garrison, Noreen and Brewer, 2012). The above statement can be proved by the following calculations:

Calculation of profit (purchase canisters)
Particulars	Amount
Sales	1672000
Less: Direct material	300000
Direct labour	180000
Variable overhead	120000
Fixed overhead	432000
Profit	640000
Profit on sale of coffee cups (per unit)
Sales:	1.2
Less: Direct material	0.6
Direct labour	0.2
Variable overhead	0.1
Fixed overhead	0.15
Profit on sale of coffee cups (per unit)	0.15
Profit on 400000 cups	60000

Calculation of total profit	Amount
Profit from canister (purchase)	640000
Profit from coffee cups	60000
Total profit	700000

So, by the above mentioned calculation is clearly stated that the company should start buying canisters from outside and start producing a coffee shop because it will be the best option which will be helping it to improve its profit. As to be observed, it was incurring less profit while producing canisters but the alternative of producing coffee mugs will help it to maximize profit.

Answer F:

There are several reasons that are needed to be considered before drawing any conclusion. Before taking a special order, the company should first look upon its financial position. If the financial aspects are satisfactory then the non-financial aspects of the company are taken into consideration (Cafferky, 2014). Nonfinancial aspects that should be taken into consideration before finalizing the decisions are as follows:

1. Quality of the manufactured product: It can happen that the company produces a very good quality product but when the product is purchased from outside, it may not meet the desired quality of the product. Hence, there should be a quality check process that should be carried out before coming to any conclusion.

1. Delivery time: The Company should discuss everything about the delivery time because due to the failure of delivery on time the order may be reduced which will not only cause financial loss but also non-financial loss.

1. Reputation: The Company’s reputation may be damaged if the quality of the product is not supplied as before. Any unsatisfactory factor like delay in delivery of goods that arises because of outsourcing may result in damage to company’s reputation.

References:

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

Bragg, S. (2014). Corporate cash management. 1st ed. Centennial: Accounting Tools.

Brigham, E. and Ehrhardt, M. (2017). Financial management. 1st ed. Boston, MA, USA: Cengage Learning.

Cafferky, M. (2014). Breakeven analysis. 1st ed. New York: Business Expert Press

Ehrhardt, M. and Brigham, E. (2011). Financial management. 1st ed. Mason: South-Western Cengage Learning.

Garrison, R., Noreen, E. and Brewer, P. (2012). Managerial accounting. 1st ed. New York, N.Y.: McGraw-Hill/Irwin.

Gitman, L. and Zutter, C. (2012). Principles of managerial finance. 1st ed. England: Pearson Education Limited.

Hoyle, J., Schaefer, T. and Doupnik, T. (2015). Advanced accounting. 1st ed. New York, NY: McGraw-Hill Education.