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Engineering Cost Analysis

Autor:   •  December 28, 2017  •  1,711 Words (7 Pages)  •  635 Views

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(b) Effect of eliminating the Deluxe Model

Sales Revenue

10,000 Utility

@ 150

1,500,000

6,000 Standard

@ 200

1,200,000

Total Sales Revenue

2,700,000

Direct Variable Costs

10,000 Utility

@ 96

960,000

6,000 Standard

@ 120

720,000

Total variable Costs

1,680,000

Contribution

1,020,000

Fixed Costs from above

1,100,000

Profit / (Loss)

(80,000)

Cont’d/ …

Solution 2 continued:

Considerations:

- Eliminating the Deluxe model will create an overall company loss, because it makes a contribution of €65 per unit ( x 4,000 = €260,000)

- Eliminating the Deluxe model may reduce demand for other products which would worsen the situation. (Market Research required).

- Alternatively, eliminating the Deluxe model may boost sales of the Standard model. (Market Research required). To get fully compensated, the shortfall in contribution (€260,000) of the Deluxe model, would require additional sales of 3,250 Standard models. (Contribution from ‘Standard’ = €80 / unit. €260,000 / €80 = 3,250 Standard units).

- Examine how the Fixed Costs are ‘absorbed’. They appear to be applied @ 250% of labour cost. Perhaps ABC might be used to more accurately allocate O/Hds.

- Examine manufacturing design and costs of the Deluxe model to reduce direct costs.

- Can a price increase be borne by Deluxe?

………………………………………………………………………………

Cont’d/ …

Q3: (Make or Buy decisions).

To produce 20,000 insulated drinks containers, a firm incurs the following costs (€):

Direct Materials

80,000

Direct Labour

20,000

Other Variable Manufacturing Overheads

40,000

Fixed Manufacturing Overhead

80,000

Total Manufacturing Cost

220,000

Manufacturing Cost per unit (€220k / 20k)

€11.00

Another producer of insulated drinks containers has offered to supply the company with 20,000 similar products for €200,000. The company considers this offer while reflecting on 2 possible scenarios:

- Accept this offer, in which case it would save €50,000 of the Fixed Overheads by making indirect manufacturing personnel redundant;

- or …

- Accept the offer, but in addition, in the interest of goodwill, retain the existing personnel and produce an insulated food container with the following cost / volume / price data:

Expected sales in units

15,000

Price / unit (net)

€25.00

Direct Materials / unit

€13.00

Direct Labour / unit

€5.00

Variable Manufacturing Overhead / unit

€2.00

- Evaluate these options; - what would you recommend?

- What ‘commercial’ considerations might apply?

Question 3 Solution:

Impact of manufacturing insulated food container

Direct material

€13.00

Direct labour

€5.00

Variable overheads

€2.00

Total variable Costs / unit

€20.00

Price

€25.00

Contribution / unit

€5.00

Total Contribution (15,000 units x 5)

€75,000

(a)

Examine the 3 options >

Make

Buy + Close

Buy + Use Capacity

Direct material

€80,000

Direct labour

€20,000

Variable overheads

...

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