00 income if Mr. Pecos accepted the committed sale made by his Office Assistant Manager.
Prepare a contribution margin income statement for the month
Based on Mr. Peco's Decision
245 per unit)
Computed as follows:
Accepted Orders by Sam Smooth talk
Accepted Orders by Harry Hustler
Accepted Orders by Garry Giftofgab
Total Selling Price
Computed as follows of units
Recommended orders to accept:
Total amount of accepted order
Total Selling Price
Assumption that $475,000 fixed cost is spread out evenly during the year, thus, fixed cost per month is at $39,583.33.
Take note that the fixed cost amount did not changed for the month. This is because fixed cost do not change as volume changes. It will be incurred in spite of how many number of units will be produced at a certain level.
The second column (recommended portion) accepted sales order for those above 276.66 cost per unit. In the second column, total units sold increased from 925 units to 1,925 units.
Other recommendations to improve operations
The usefulness of cost-volume-profit analysis as a planning and deciding tool depends on Management's estimates about future conditions. Manager's attitude toward risk-return relationship influences decision of Company's planned and target cost and income.
With this note, I would suggest serious reevaluation of Mr. Ledger's analysis. Management's assumption may make or break the Company's success in budgeting its cost and maximizing profit. With previous illustration,...
It can result to lost opportunity of earning higher income or higher sales volume.
Additional suggestion is for the Company to evaluate its capacity to provide commissions or incentives to its sales team or employee. It maybe a great motivation or drive for the employees to perform at their best capacity.
Another suggestion is to cascade a uniform sales price to the distributors. The distributors might compare its buying price with another distributor and those with higher price may demand adjustment to lower price. This could cause dispute or even loss of possible customers.
Support Computation for Requirement 3
Fixed Cost for the year
Variable Cost of units
Contribution Margin (following Mr. Pecos' requirement - Sales price must be $300 and up) of units
SP per Unit
Variable Cost (925 units x $245)
Contribution Margin (Writer's Recommendation to accept orders with SP $280 and up) of units
Variable Cost (1,925 units x $245)
Louderback, J.G. III, Holmen, J.S., Dominiak, G.F. (2000). Managerial Accounting,
Profit Planning (pp.29-58). South-Western College Publishing
Cost/Benefit Analysis: Evaluating Quantitatively Whether to Follow a Course of Action. (2007).
Retrieved August 14, 2007, at http://www.mindtools.com/pages/article/newTED_08.htm
Pajala, R.E. (1993). A Simple Profit Planning and Cost…
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