Management Accounting For Computation Transfer

Analysis

Under Part 1 of stated scenario 1, one can see that it deals with deals with the determination of the profits of an entrepreneur, Ms. LOUSIE FAIRBERN from her business which consist of two distribution channels. The name of the distribution channels are a consulting business wherein there exists two clientele Mr. Adams and Mr. Betz while the other consulting business includes commercial window treatment business wherein there exists three clientele namely  Mr. Chatham, Mr.Dedham  and Mr. Elm. . Further, it shall be pertinent to note that Mr. Adams is provided a discount of 10% for luring customers from her competitors and a 5% discount to Mr.Elm for ensuring expedite payments. On the basis above detail a simulation has been tabulated here-in-below stating profitability of the business : 

Consumer Profitability
							(Amount in AUD)
Sl. No.	Particulars Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Adams	Betz	Chatham	Dedham	Elm	Total
1	Gross Revenue	234000	188800	357380	147840	73200	1001220
2	Direct Cost	147000	117200	218400	115720	57040	655360
3	Gross Profit	87000	71600	138980	32120	16160	345860
4	Indirect costs
	— Activity based Overheads	85100	136160	221260
		47099	38001	84127	34802	17231	221260
	-Balance over head allocation	27845	22466	42526	17592	8710	119140
5	Discount	23400				3660	27060
6	Net Profit	-11344	11133	12326	-20274	-13442	-21600

							(Amount in AUD)
Sl. No.	Particulars	Adams	Betz	Chatham	Dedham	Elm	Total
1	Direct Cost	147000	117200	218400	115720	57040	655360
2	Indirect costs
	– Activity based Overheads	85100	136160	221260
		47099	38001	84127	34802	17231	221260
	-Balance over head allocation	27845	22466	42526	17592	8710	119140
3	Total Cost	221944	177667	345053	168114	82981	995760

On the basis of above, one can understand the company is running on losses.  Further, the allocation of overheads on the basis of activity had been done at 25% and 45% . Further, the same has been allocated customer wise on the basis of gross revenue.

In addition, the balance cost has been allocated on the revenue basis to all clients as detailed in the simulation.

Further, discounts provided to specific customers have been allocated.

 PART 2

Dear Louis,

Hope you are doing well.

As you have requested us in our last meeting to provide you a report with a detailed analysis of customer costs, profitability, distribution channel profitability and total profitability of your business. In this regard, please find the report enclosed herewith and marked as annexure-1

Regards,

Your consultant  

Louise Fairbern is an entrepreneur. Her business consists of two distribution channels. The name of the distribution channels are a consulting business wherein there exists two clientele Mr. Adams and Mr. Betz while the other consulting business includes commercial window treatment business wherein there exists three clientele namely  Mr. Chatham, Mr.Dedham  and Mr. Elm. . Further, it shall be pertinent to note that Mr. Adams is provided a discount of 10% for luring customers from her competitors and a 5% discount to Mr.Elm for ensuring expedite payments.

On the basis of details provided above, a detailed analysis was conducted with emphasis on cost associated with each individual client and revenue generated from such client. A detailed simulation has been provided here-in-below wherein the cost and profit from each client has been tabulated.

							(Amount in AUD)
Sl. No.	Particulars	Adams	Betz	Chatham	Dedham	Elm	Total
1	Gross Revenue	234000	188800	357380	147840	73200	1001220
2	Direct Cost	147000	117200	218400	115720	57040	655360
3	Gross Profit	87000	71600	138980	32120	16160	345860
4	Indirect costs
	-Overheads	85100	136160	221260
		47099	38001	84127	34802	17231	221260
	-Balance over head allocation	27845	22466	42526	17592	8710	119140
5	Discount	23400				3660	27060
6	Net Profit	-11344	11133	12326	-20274	-13442	-21600
7	Business wise result	-211	-21389	-21600

On perusal of the above simulation, it may be understood the following:-

• Gross revenue earned by Ms.Louise  from her business stands at AUD 10,01,220/- while the direct cost associated  for earning such revenue stands at AUD 6,55,360/- which is 65% of the gross revenue earned from such business. Accordingly contribution cum gross profits stands at AUD 345860/- nearly 35%  of the gross revenue. 

• Further, it can be understood that the indirect cost of running the business stands at AUD 3,40,400/- . The same is approximately 35% of the gross revenue of the business of Louise. In addition, for analysing the each customer profitability, these indirect cost has been allocated to various customers on the basis of revenue earned from making sales/ service to them during the course of business. 

Recommendation

Further, 25% of the above stated cost has been allocated to consultancy service and 40% to window treatment business.  Also ,, the same has been allocated customer wise on the basis of gross revenue. 

In addition, the balance cost has been allocated on the revenue basis to all clients as detailed in the simulation. 

• Post allocation of aforesaid cost, discount allocated by Louise to her two specific customers have been taken into consideration. Ms. Louise has offered a discount of 10% to Adams for attracting customers and a 5% to Elm for quick payment of services received. 

• Post allocation of discount to specific customers, it may be seen that business is incurring losses and there is a loss of near about AUD 21,600/- which  stands at  approximately 2% of  gross revenue of Louise’s business. Thus, the proposed business is running in loss. 

• On further analysis of profitability of business of Louise i.e. on the basis of consultancy wise and window treatment service wise, one may observe that the consultancy service is incurring a loss of AUD 211 while the business of window treatment service has incurred losses of AUD 21,389/ which forms a major chunk of losses of the company. Thus, prima facie it may be seen that both business of Ms. Louis has been  incurring losses 

• Further, going for an indepth analysis on the basis of clientele, it may be observed that sales made to Adams has incurred a significant loss of AUD 11,344 /-. While the services that were made to Betz has let the firm  to earn a margin of AUD 11,133/- which is substantially huge. For other customers such as Chatham , Dedham and Elm are considered, it may be observed that  profit /loss of AUD 12,326/-, AUD -20,274 and AUD 13,442/-  respectively has been earned /incurred from them. The table has been detailed here-in-below:   

							(Amount in AUD)
Sl. No.	Particulars	Adams	Betz	Chatham	Dedham	Elm	Total
1	Gross Revenue	234000	188800	357380	147840	73200	1001220
2	Direct Cost	147000	117200	218400	115720	57040	655360
3	Gross Profit	87000	71600	138980	32120	16160	345860
4	Indirect costs
	-Overheads	85100	136160	221260
		47099	38001	84127	34802	17231	221260
	-Balance over head allocation	27845	22466	42526	17592	8710	119140
5	Discount	23400				3660	27060
6	Net Profit	-11344	11133	12326	-20274	-13442	-21600
7	Business wise result	-211	-21389	-21600

On the basis of detailed analysis, carried here-in-above following recommendations have been proposed:

• Louise should not offer any discount to Mr.Adams . If such event is not possible, then discount shall be offered  in the range of 1%-5%;
• Louise can forego one of her clientele Mr. Dedham as he is major contributor to loss of business or an alternative can be done in the form of charging extra prices;
• Louise should increase her bargaining power and should put reliable efforts in  cost cutting;
• Louise should stop offering discount to Mr.Elm. 

Conclusion

The business of Ms. Louise has been incurring losses and the same can be mitigated by following the steps proposed under recommendations.    

The detailed computation has been provided here-in-below:

Sl No	Particulars	Super Chip	Okay Chip
1	Direct Material	5	2
2	Direct Manufacturing Labour	60	20
3	Prime Cost	65	22
4	Sale price	80	26
5	Contribution (4-3)	15	4
6	Hours	3	1
7	Contribution per Hour	5	4
8	Total Hours	45000
9	Total Contribution from Super Chip (7*8)	225000
10	Annual Fixed Cost	400000
11	Loss (9-10)	-175000
12	Manufacturing of unit	15000	0.00
13	Sale	15000	0.00

The above computation involves computation of contribution which has been derived by reducing variable cost from sales. Further, contribution per hour has been computed by dividing contribution on the basis of labour hour. Post that it was observed that the contribution per hour for super chip is greater than Okay chip by AUD 1. Accordingly, Super Chip shall be produced maximum. Further, there is active market of 15000 units of Super Chip and hence the same is produced.

The detailed computation has been provided here-in-below:

Sl No	Particulars	Process Control Division	Proposed Scenario
1	Direct Material	70	65
2	Direct Manufacturing Labour	45	45
3	Prime Cost	115	110
4	Sale price	132	145
5	Contribution (4-3)	17	35
6	Hours	3	3
7	Contribution per Hour	5.67	11.67
8	Contribution forgone of Super chip		5.00
9	Net Contribution (7-8)	5.67	6.67
10	Decision	Yes, should be switched
11	Increase in Contribution (1)*3*5000	15000

On the basis of above computation, one may observe that the net contribution under the proposed change increases by AUD 1 per hour. Hence, the same may be carried out.

Further, the above computation has been carried out by estimating contribution which has been derived by reducing variable cost from sales. Further, contribution per hour has been computed by dividing contribution on the basis of labour hour

The three transfer price has been computed for the purpose of deriving the range. The first transfer being extremely high and the process division may not agree to the same. Thus, only two transfer price has been used for determining range. The computation has been provided here-in-below:

Transfer Price 1

Sl No	Particulars	Super Chip
1	Direct Material	5
2	Direct Manufacturing Labour	60
3	Prime Cost	65
4	Overheads	26.67
5	Transfer Price  (3+4)	91.67

Transfer Price 2

Sl No	Particulars	Super Chip
1	Direct Material	5
2	Direct Manufacturing Labour	60
3	Prime Cost	65
4	Contribution	15
5	Transfer Price (3+4)	80

Transfer Price 3

Sl No	Particulars	Super Chip
1	Direct Material	5
2	Direct Manufacturing Labour	60
3	Prime Cost	65
4	Contribution	15
5	Sharing of Additional Contribution	1.5
6	Transfer Price (3+4+5)	81.5

Thus, on the basis of above computation transfer price shall range between 80-81.5 AUD per unit.

The said range has been derived on the basis of understanding that both division shall ensure maximum profitability. Thus semi-conductor division shall not transfer chip below its current sale price and shall also try to share profits on account of transfer of super chip to process division which is AUD 3 per unit. In addition, the process division shall not pay any amount greater than the 50% of profits on account of proposed change. Hence, the said transfer price has been determined.

The detailed computation has been provided here-in-below:

Sl No	Particulars	Super Chip	Okay Chip
1	Direct Material	5	2
2	Direct Manufacturing Labour	60	20
3	Prime Cost	65	22
4	Sale price	80	26
5	Contribution (4-3)	15	4
6	Hours	3	1
7	Contribution per Hour	5	4
8	Total Hours	60000
9	Total Contribution from Super Chip (7*8)	300000
10	Annual Fixed Cost	400000
11	Loss (9-10)	-100000
12	Manufacturing of unit	20000	0.00
13	Sale	15000	0.00

On perusal of the above table, one can understand that the division is still incurring losses even if the said transformation takes place and the above transfer price shall hold good  as the transfer price shall be greater than equal to current sale price.