Financial Proposals Financial Incremental Profit

Question: Discuss about the Financial Proposals for Financial Incremental Profit. Answer: Proposal 1: As the Proposal of increasing $10 per unit is not bad but we should also analyze the rate offered by our competitors because if already the competitors are offering very effective rate than us then it will be very difficult for us to increase the price. If there is scope to increase the price then we should increase because that would yield us the following incremental profit: Increase in revenue: 10* 20000= 200000 Less: Advertising exp. =125000 75000 From the above we can see that with the increase in $10 per unit we can earn incremental profit of $75000. So concerned managers first should research the rate of competitors and also the related quality because quality also effects the price then take decision accordingly. Proposal 2: Increase in quality rather than increase in price- yes, definitely if there is scope to enhance the quality then company should do the same because if our quality is good then customers can also pay premium price to us because in todays era customers want quality. The production manager should first check the quality of the products sold by their competitors so that they can compare and accordingly enhance their products quality. With the increase in quality we will be able to sale more by 20000*25%=5000 units which will give us additional revenue of 5000*(130-85 variable cost)= $225000 which is good amount. Proposal 3: Undertake promotional campaign- As under the promotional campaign $10 has to be offered to the customers but before doing that we should analyze whether the same is viable to us or not. After discount sales price will remain to $120. So after this the profit will 6000*130 =$780000, now company will sell at 10000*120=$1200000 but there will be expense of $40000. So net profit will be $1200000-40000=$11,60,000. So, Sales manager first should properly analyze the market, then take the decision. 2. The capacity of the company is 200000 units per year: As presently the company is planning to manufacture 150000 units per year. So, 50000 units capacity is remaining ideal. So, company should avail the opportunity to fill the balance capacity of 50000 units. As the company has an opportunity to sale 40000 units to a government department, it should avail it. The companys selling price is $15 and it will cost only $7 because other are fixed costs so sunk costs. In other words total profit increase will be 40000*($15-$7)= $ 320000. So company should avail this opportunity. Or The capacity of the company is to manufacture 180000 units but it has already planned to sell 150000 units. It has left over only 30000 units free. If the government department is agreeable to buy 30000 units from this company, then it should go for it because it is generating additional revenue for it. On the other hand, if government department is not agreeing for part load then it can also plan for outsourcing. Outsourcing should only be finalized after full and proper calculations and profit from that. Direct Material Cost $2.50 Direct Labor Cost 3.00 Variable Factory Overhead 1.50 Fixed Factory Overhead 2.00 Manufacturing Cost 9.00 Fixed Selling and Administrative Cost 1.50 Total Cost 10.50 20% Mark-up 2.50 Selling Price $13.00 3. Yes salaries and depreciation can end up with asset in a balance sheet because If we pay salary as an advance to employees, then it will be debited to asset account rather than debiting to expense account. Second school of thought is that if we pay the salary regarding the installation of asset, then that will also be debited to asset account rather than debiting to expense account. Depreciation: We pass entry for depreciation as Depreciation A/c_____DR To Accumulated depreciation By debiting depreciation, we are creating a charge over an asset. If we dont credit the accumulated depreciation, then we will credit the asset A/c. So, in other words, we are crediting an asset while passing depreciation. Suppose we have to pass an entry of depreciation of $2000. We will pass Depreciation A/c_____DR 2000 To Acc. Dep A/c2000 With this, I am crediting the asset . Just my way of passing an entry is different. 4.mAs the process is labor extensive so the overhead allocation rate will be labor hours based: Indirect costs $98400 Direct labour hours 25,795 So, overhead allocation rate will be $ 3.81per hour. Total costs of special order: Material Costs: $33810 Direct labor costs: $17780 (12.70*1400) Indirect cost : $5334 (3.81*1400) Machine Hours: $5250 (10*525) Assuming that indirect cost is machine cost $62174 Total cost of special order if ABC costing is used and machine hours are used for allocating overheads: Material Costs: $33810 Direct labor costs: $17780 (12.70*1400) Indirect cost : $ 5250(10*525) Machine Hours: $5250 (10*525) $56840 Minimum price that ABC Ltd should accept of trailer is as follows: Material Costs :$33810 Direct labor costs: $17780 (12.70*1400) Indirect cost : $ 5250(10*525) Machine Hours: $5250 (10*525) $56840 Activity based costing should be used to calculate the accurate cost of the product because in activity based costing, the costs are applied on the basis of their contribution in that particular activity. If a particular product has not availed services of a particular department then, the cost of that particular department will not be allocated to that particular product which gives us correct costing of a product. In ABC method cost is allocated considering the cost drivers. Only that costs will be allocated to a particular product if that product has availed the services of that particular department. On the other hand what used to happen in normal costing is that the total cost is divided by total number of products and the cost per unit is calculated. So, on whole If we want to calculate accurate cost of a product then we should use ABC method instead of traditional method because in traditional method every product carries equal cost but in actual it is not like that.