Accounting for Managers

Accounting for Managers 

Question 1

Jodie, the owner of The Gift Post is concerned that one of her product lines (Himalayan salt lamps) is not generating enough sales and that the gross profit margin is not meeting the benchmark that she has set for this product. Jodie is considering removing this line of product from her product mix and is exploring an alternative product – a new brand of Jigsaw puzzle that is not currently available in the market. Market research has indicated that jigsaw puzzles have become extremely popular during the lock down period caused by Covid-19 and she is hoping that she can take advantage of this increase in demand for this product. Before she makes her final decision, Jodie has asked you to provide an analysis and recommendation as to whether bringing jigsaw puzzles into the product mix is of the business is a viable option. Jodie has conducted some initial market research and has estimated that she could sell these puzzles for $45 each. Jodie has explored purchasing the product overseas, but would ideally like to buy locally to support local small businesses. The estimated variable costs per unit to purchase the puzzles overseas are as follows

Cost of product          $12.20

 Freight cost               $ 6.10 

Taxes and Duties       $ 2.25 

It is estimated that the business will need to spend an additional amount of $2,500 on a marketing campaign to promote the product. This campaign will focus on the existing customer base initially. 

Fixed costs in the amount of $15,000 have been allocated to this new initiative.

Jodie has asked you to undertake a cost-volume-profit analysis of this opportunity.

a) Calculate the contribution margin and contribution ratio for the new product.

b) The breakeven point in the number of jigsaw puzzles and dollars of revenue.

c) The business is requiring a target profit of $10,000 in the first year of introducing the jigsaw puzzles. How many puzzles will it need to sell in order to meet this target profit?

d) There is a small manufacturer located in Williamstown who can make the puzzles that Jodie is after, rather than having to buy overseas. This would eliminate the costs associated with taxes and duties and a reduction of freight costs by 30% on initial estimates. However, there would be an increase to the cost of the product by 25%. This price will be firm for the next three (3) years. Calculate the breakeven point under this option and briefly discuss which option would be preferred.

Question 2 

Paint me White are in the furniture manufacturing business. One of their largest customers – Red door furniture, wishes to place a significantly large order for painted coffee tables. The customer has issued a purchase order for 1,000 coffee tables. You have spoken with the production supervisor and they have indicated that the factory currently has the capacity to produce this order. Red Door furniture are looking for a significant discount of 20% on the normal retail selling price of $250 Paint me White are charging for coffee tables to their other customers. You are a little unsure as to whether or not Paint me White will still make a profit on this order, if this discounted price is accepted. You have decided to provide Paint me White with a costing analysis to ensure that this is a viable option for the business. You have decided to use the current costings for direct materials being used by the company for the production of the coffee tables being $90 per unit. It is estimated that the order will take approximately 8 weeks to complete. There will be approximately 7 factory staff working full time on the order. Each of these staff members will work a 40 hour week and be paid the normal hourly rate of $25 per hour. Paint me White allocate overhead based on a direct labour hour basis. It is estimated that the total hours to be worked for the whole business for the year will total 220,000 hours. Estimated overhead for the whole business for the year is estimated at $550,000. In your analysis for Paint me White, you will need to include the following:

a) What does the term cost driver mean? What cost driver could Paint me White use other than labour to allocate their overhead for the manufacturing process? Why do you think this might be an appropriate driver to use? 

b) Use job costing to determine the full cost of the order and on the basis of this full cost, make a recommendation on whether the discount should be given. This analysis should provide all necessary workings and be clearly presented so that the owner of Paint me White can easily follow and understand.