In this order of ideas:
The sales revenues would be significantly high throughout the first six months and they would allow the company to cover for the large costs incurred in the manufacturing of the product as well as register profits; they would however decrease with the implementation of the market pricing strategy and the 3-in-1 Lawnmower would metamorphose from a star product into a cash cow
The costs incurred in the manufacturing of the new lawnmower have already begun to decrease and will continue to do so; the actual impact of the pricing strategy is limited, with the specification however that these costs will not be allowed to increase over an imposed limit, pegged to the retail price and the expected sales
Profits would be increased throughout the first six months, but will then decrease; the lower profits will however be more sustainable in the future as they will be based on a solid product that attracts customers through quality and functionality, rather than the element of novelty
6. Absorption and Marginal Costing
The stands of specialized economists on the issue of absorption and marginal costing vary. For instance, some argue that absorption allows the organizations to set prices which reveal the maximum utility of the product, whereas others argue that the utility revealed through absorption is the expected, not the maximum one (Hilton, Swieringa and Turner, 1988, p.196). Aside the utility revealed, absorption costing is generally characterized by the fact that it includes all manufacturing costs and sometimes all, or part of the overheads, in the final cost of the product and it does this with the aid of overhead absorption rates. Marginal costing on the other hand assigns only the variable costs to products (BPP Professional Education). Given the situation at Nippers and the previous recommendation towards a skimming pricing strategy continued by a market oriented retail policy, it is at this stage advisable for Mrs. Dibsa to select the marginal costing system for the reason that it allows her accountant to selectively integrate the costs in the retail price and also as the movements in sales will be able to reveal linkages to costs and profits. This system of organizing sales, costs and revenues will allow Mrs. Dibsa to make better informed decisions which support her in reaching her organizational goals.
7. The New Costing Schedule
Costs per special order
Rand
Direct wages
313,000
Supervisor costs
90,000
General overheads
40,000
Machine depreciation
28,000
Machine overheads
220,000
Materials
333,750
Testing and correction costs
20,000
Marketing Expenses
50,000
Bank loan
236,000
Total expenses
1,330,750
The initial costing schedule is widely comprehensive and sufficient and offers a true depiction of the financial implications of manufacturing Nippers' 3-in-1 Lawnmower. Yet, it is necessary to make some changes in the amounts of money initially estimated. In this order of ideas, the following changes have been made:
Direct wages increased from R285,000 to R313,000 as specialists with the new technique will be brought in Supervisory costs were decreased from R115,000 to R90,000 as the employee handling the task will lose his incentive pay in the value of R25,000
Machine depreciation has been adjusted to more realistic expectations and was increased from R23,000 to R28,000
Due to the reduced hours available on the machines, the costs with machine overheads were increased from R180,000 to R220,000
The costs with materials were decreased from R340,000 to R333,750
Aside these modifications, it was also necessary to introduce new categories of costs which were first overlooked:
The testing and correction costs refer to the expenses incurred with the process of verifying the functionality and capabilities of the 3-in-1 Lawnmower and correcting and features which need adjustments
The marketing costs refer to the expenses incurred with the advertising and promotion of the new product, including elements such as television, radio and internet advertisements or street banners
As Nippers does not possess sufficient financial resources, it will be necessary for...
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