Maximizing Profits Through Effective Decision Making – A Case Study

Detailed research and analysis

Decision making is an important part of the business and the growth and success of the business depends on the effective decision making. There are various types of options which are available in regard to carrying out the operations of the business. The business needs to carry out effective operations which may lead to high profits with the minimum funds. The production company is having a specified production capacity and it needs to carry out its operations within that specified capacity. Citrus company is having various options in regard to the production and selling of its boxes. Thus the company needs to evaluate each and every option in order to select the option which provides maximum utility and highest profits. The various options are evaluated on the basis of increasing profits and income towards the business. (Gerald M. Myres, 2005)

Citrus company is producing quality fruit. It is having high sales in the spring and summer season and is having comparatively low sales in the month of autumn and winters. Thus it is having idle production capacity in relation to autumn and winter months. Hence the company is having different options from different suppliers and the options are evaluated on incremental approach in order to select the best option and also to evaluate whether the option is to be selected or not. (Adela Breuer, 2013)

The calculation of the monthly profit during a summer month when all 40000 boxes produced in the month were sold

Particulars	Amount Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper
Selling price of fruit per box	$9.50
Less:
Direct material per unit per box	$4
Direct labor per box	$2
Variable overhead per box	$0.80
Variable marketing overhead per box	$0.5
Contribution per box	$2.2
Number of boxes sold during the month	40000
Total contribution earned from the box	$88000
Less: Fixed overhead	$10000
Less: Fixed marketing costs	$15000
Net profit earned in the summer month	$63000

The profit is calculated on the basis of data given in the question. The contribution approach is used for calculating the net profit for the summer month when the company is producing 40000 boxes. The company will earn a profit of $63000 in one summer month.

The company had received a supply from the overseas market to supply 5000 boxes during the autumn and winter months. The cost of landing which is incurred for one month will be deducted while calculating the net incremental profit by way of overseas supply. The incremental revenues and incremental costs are considered for the purpose of calculating the net profits. The company will be using its idle capacity to produce the and supply 5000 boxes in the overseas market but the selling price in the overseas market is less in comparison to the domestic market hence the proposal needs to be evaluated effectively in order to obtain best results. (Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso, 2010)

The other factors that should be considered other than the financial analysis are as follows:

1. The economical state in the overseas market should also be taken into consideration.
2. The credit period should also be taken into consideration which will provide the months after which the amount will be received from the overseas market.
3. The exchange rate between the overseas market and the domestic market should be carefully considered.
4. The fluctuations in the exchange rate should also be taken into consideration.

The calculation of profit from the special order being received from overseas to supply 5000 boxes of fruit per month during the autumn and winter month are as follows:

Particulars	Amount
Selling price of fruit per box	$7.50
Less:
Direct material per unit per box	$4
Direct labor per box	$2
Variable overhead per box	$0.80
Cost of freight per box	$0.40
Contribution per box	$0.30
Number of boxes to be sold during the month	5000 boxes
Total contribution to be earned in the month	$1500
Less: incremental cost of landing	$1000
Net incremental profit that will be earned from the overseas supply per month	$500
Net incremental profit for the year	=$500*6 = $3000

1. It is being assumed that variable marketing cost of $0.5 per unit will not be incurred on the supply that will be made in the overseas market as no marketing will be required in regard to the overseas supply as the sale is already decided.
2. It is being assumed that the cost of landing will be incurred per month and thus it is accordingly reduced as the fixed cost. (Stefania – Eliza Bana, Florin Sgardea, 2009)

The company had received offer from the long term government contract under which company will be supplying 10000 boxes every month for the whole year. No additional costs are being incurred in case of long term government contract and thus it is evaluated on the basis of the net earnings that will be received by the company.

The calculation of the incremental profit that will be made by way of entering into a long term government contract in regard to supply of 10000 boxed every month is as follows:

Particulars	Amount
Selling price of fruit per box	$8
Less:
Direct material per unit per box	$4
Direct labor per box	$2
Variable overhead per box	$0.80
Contribution per box	$1.2
Number of boxes to be sold in the month under the contract	10000
Total contribution from the above contract	$12000
Less: incremental fixed cost	Nil
Net income to be received from the above contract every month	$12000
Net income for the year from the long term government contract	$144000

1. It is being assumed that no variable marketing cost will be incurred on the boxes sold under the long term government contract as it is already decided that 10000 boxes will be sold every month as signed under the contract. (Horngren, C. T., Datar, S. M. and Foster G., 2000)

The company had received an order of 8000 boxes which are to be supplied at a price of $7.8 each but the company will incur cost of $0.20 per box. Thus the company needs to consider the additional variable cost that will be incurred in regard to this order. The company needs to check the order on the financial grounds but it will have to consider other factors also in regard to accepting the offer such as:

1. The credit period given to the customer that is the number of days after which the payment will be received by the company.
2. The credit worthiness of the supplier in order to make sure that there will no bad debts in regard to the supply being made by the company.
3. The background of the company in order to ensure that the supplier is true and fair and thus work ethically and maintain ethical relationship.

The calculation of the net profit from the request received from an outside supplier in regard to supply of 8000 boxes every month is as follows:

Particulars	Amount
Selling price of fruit per box	$7.80
Less:
Direct material per unit per box	$4
Direct labor per box	$2
Variable overhead per box	$0.80
Cost of additional freight per box	$0.20
Contribution per box	$0.80
Number of boxes to be supplied each month	8000
Net income to be received every month by supply of 8000 boxes fruit year round every month	$6400
Net income to be received throughout the year	= 6400*12 =$76800

It is being assumed that the variable marketing costs will not be incurred on the number of boxes to be supplied to the outside supplier as the sale to the outside supplier is fixed and no additional cost is to be incurred in order to induce sales. (Lucey T., 1992)

The company had received an offer that it may rent its property to the government but if the company will rent its property to the government then it will have to close its manufacturing activities which will lead to loss to the company. The company will be receiving rent from the government but in return the profit earned on sale of fruits will work as the opportunity cost to the company. Thus the company will have to evaluate the amount received by way of renting the property to the government with the opportunity cost that is the amount that it had earlier received by way of selling fruits after deducting the expenses incurred in the production. The financial analysis gives details in regard to the quantitative attitude of the offer but it will also have to take into consideration the other factors in order to arrive at the effective decision. Thus the other factors that should be considered in regard to the decision are as follows:

1. The payment scheme of the government in order to make sure that the rent is received on the specified dates.
2. The period for which the property will be taken on rent is a crucial point as the short term rent may lead to loss to the company hence the company should rent the property for a longer period.
3. The rent agreement should contain an inflation clause which will provide that the rent to be received every year will receive by a certain percentage so that the income of the company will increase in the near future.
4. The future prospects in regard to rent of property should be checked so as to ensure regular income to the company.

Evaluation of the offer received from the government in regard to renting the property to the government in order to build housing facility is as follows:

Particulars	Amount
Selling price of fruit per box	$9.50
Less:
Direct material per unit per box	$4
Direct labor per box	$2
Variable overhead per box	$0.80
Variable marketing overhead per box	$0.5
Contribution per box	$2.2
Number of boxes to be supplied during spring and summer months	40000
Number of boxes to be supplied during autumn and winter months	30000
Total number of boxes to be supplied during the year	= 40000*6+ 30000*6 = 420000
Thus the total contribution to be received during the year	= 420000*2.2 = $924000
Less:
Fixed manufacturing overhead	= $10000*12 = $120000
Fixed marketing overhead	= $15000*12 = $180000
Net income to be received by way of production activities	$624000
Rental charges received by the Citrus company in the year	= 60000*12 = $720000
Incremental income received by way of renting the property to the government	$96000

It is being assumed that there are three months in every season and thus accordingly the number of boxes are delivered throughout the year are calculated and hence the amount of net income is calculated. (Adela Breuer, 2013)

Conclusion

1. The company will earn a net profit of $63000 in the summer month
2. The net incremental profit for the year will be $3000
3. The company will earn a incremental income of $144000 from entering into a long term contract with government
4. The company will be having a net income of $76800 by supplying 8000 boxes of the fruit year round.
5. The company will be having additional income of $96000 if it enters into a contract in regard to renting the property instead of carrying out the production activity and thus closing the production activities accordingly.

1. The company is having net profit and thus it should carry out its operations in the summer month.
2. The company should supply 5000 boxes of fruit per month during autumn and winter month as it will be having net income of $3000 by accepting the offer.
3. The company should accept the offer of long term government contract as it will provide net income of $144000 to the company and hence it should supply 10000 boxes per month to the boxes.
4. The company should accept the offer to supply 8000 boxes to outside supplier as it will provide net income of $76800.
5. The company should rent the property to the government as it will provide higher income in regard to production.

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