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Finance Assignment Question
Bonza Handtools Ltd. manufactures a popular power drill suitable for the home renovator. Financial and other data for this product for the last twelve months are as follows:
Sales 20000 units
Selling price $130 per unit
Variable manufacturing cost $50 per unit
Fixed manufacturing costs $400000
Variable selling and administrative costs $30 per unit
Fixed selling and administrative costs $300000.
The directors of Bonza Ltd. want to try to increase the profitability of this product and invited senior staff to suggest how this might be done. Three suggestions have been received.
· The accountant, Jan Rossi, believes that a price increase of $10 per unit is the best way to boost profits. She would spend an additional $125000 on national advertising and contends, that if this is done, sales volume would not drop appreciably from last year.
· The production manager, Tom Tune, thinks that an improved quality product could increase sales volume by 25% if accompanied by an advertising campaign costing $50000 aimed at tradespeople as well as home renovators. The improved quality would add $5 per unit to the variable cost. Mr Tune believes that the price should not be increased.
· The sales manager, Mary Watson, wants to undertake a promotion campaign where a $10 rebate is offered on all drills sold during the three months beginning 1 April. Normally 6000 units are sold during that period and Ms Watson believes that this could be boosted to 10000 units if an advertising campaign costing $40000 were launched late in March.
You have been asked by the Bonza board to comment on each of these three proposals. Draft a report in response to this request. You are not asked to make an outright choice, but rather to analyse the potential strengths and weaknesses. The sales volumes forecast by each staff member should be treated as estimates only and your report should examine the effects of variations in actual sales from these forecasts.
Give figures to support your comments and mention qualitative factors that may also be involved.
The Tassie Company estimates that next year it will manufacture and sell 150000 units of its product. On the basis of that level of activity, it has budgeted for the following costs and prices per unit:
Direct Material Cost $2.50
Direct Labour Cost 3.00
Variable Factory Overhead 1.50
Fixed Factory Overhead 2.00
Manufacturing Cost 9.00
Variable Selling and Administrative Cost 2.00
Fixed Selling and Administrative Cost 1.50
Total Cost 12.50
20% Mark-up 2.50
Selling Price $15.00
The Company has an opportunity to bid for the supply of an additional 40000 units of its product to a government department. No sales commission (variable selling and admin. cost) is involved and no additional fixed costs will be incurred.
Give a reasoned opinion on the level of the bid that should be made in each of the following two circumstances:
(i) The capacity of the Tassie Company’s factory is 200000 units per year.
(ii) The capacity of the factory is only 180000 units per year.
Critically discuss the following statements: Word limit for Question 3 – 750 words
•‘a budget is a forecast of what is expected to happen in a business during the next year’
•‘budgets are okay but they stifle all initiative. No manager would work for a business that applies control through budgets.’
• ‘any sensible person would start with the sales budget and build up the other budgets from there.’
•‘a budget trying to be realistic will not motivate best performance.’
• ‘only adverse variances are worth investigating, because favourable variances, by definition, must be good.’
ABC Ltd makes trailers. It receives a special order to produce 350 trailers for a local retail outlet. The order will take 2,100 kg of material that costs $16.10 per kg and will require 1,400 direct labour hours and 525 machine hours. The following are the expected/budgeted annual costs for ABC Ltd:
Direct labour $327,600
Direct labour hours 25,795
Direct materials $193,200
Indirect costs $98,400
Machine hours 9,840
Calculate the overhead allocation rate: note that the process is labour-intensive
Calculate the total costs of the special order
Calculate the cost of the special order if ABC Ltd uses machine time as the basis for allocating overheads
Calculate the minimum price per trailer that ABC Ltd could accept.
Explain how segmented overhead cost pools and activity based costing can assist accurate costing for pricing purpose (200 words)
Write around 500 words explaining how segmenting the overheads can help in allocating overhead costs to individual jobs or services. You must support your discussion by real world examples and acknowledge the source of your information (referencing).
Finance Assignment Solution for Accounting for Managers
We have maintained the fixed costs and selling and Administrative costs as 0 since these are calculations of the additional products and these costs are not incurred.
In the first case, the Tassie Company’s factory would not have to expand its existing capacity as it is not working to the full capacity of its factory. Hence the Tassie Company should definitely try to get the order for the additional products since it has the capacity already.
The total cost of each unit when the company is producing 150000 is $12.5 but that value comes up to only $7 as seen in the calculations above when the additional 40000 units are produced. Since the customer is a government department it may be likely that there may be many competitors so Tassie can afford to make a lower bid on each unit and still be profitable. However, in this case, there does not arise a need for that.
For these 40000 units, it can obtain a profit of 500000-280000=220000 since the additional costs are not there.
Hence the profit margin of $2.5 can be obtained and those 40000 products could be sold at $9.5. Hence the total Bid Price is 380000 as calculated above.
In the second case, the capacity of Tassie Company’s factory is given as 180000.Now when 40000 units are added it would go over the capacity of the company and the company would then have to again invest in the fixed costs. This would not be feasible for the company and hence it is going ahead with the bid it would be an astronomical amount. Hence the company should not go ahead with the bid.
Total Additional Costs=300000+300000+225000=825000.
A budget provides a detailed insight into the future financial results that a particular business aims to achieve over a certain period of time. A predetermined budget is always reviewed at the end of the year to understand the variances.
The actual data is then compared to the expected values and then the actions are taken accordingly. As a result, the company is able to improve upon certain aspects which need close attention.
As a result, a budget is important for a company to get a better view into the next year and thereby improve its functioning on a year to year basis.
A budget is all well and good since it provides a company to build long-term or strategic plans for the future. However, there are certain factors known as limiting factors which threaten to impede the progress of the company.
The limiting factors may include labor, capital or lack of proper machinery required (BlackHall Publishing, 2010). As a result of these factors sometimes the manager needs to able to works with these constraints. However often the managers feel that they need the appropriate resources to develop their projects and may get frustrated if not provided. Hence there can be situations where they may be unhappy with budgets.
Yes, it is important that a person looks into the sales budget before deciding the other budgets. The Sales budgets give the firm an idea about the future sales operations of the firm and accordingly the required resources can be obtained.
However to obtain a number of sales to be done in future would be a difficult job and thorough insight of the working of the existing market and its various customers are imperative to get a good estimate of the sales budget. Although the sales budget is tough to estimate it is the most important budget and should be given first priority.
Also, it is vital to take any possible constraint into consideration while estimating the sales budget.
A budget needs to be achievable and not unattainable .It is important that a budget is aligned with the strategic goals of the company. In case it is not aligned the budget is revised in order to match with the goals of the firm.
It is not important for a budget to be unrealistic to encourage the employees. Unrealistic budgets may cause the manager or the employees to manipulate the data. Also if a budget is over the board it may happen that the firm fails to gauge its exact performance in the market.
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