Engineering Cost Analysis
Autor: Tim • December 28, 2017 • 1,711 Words (7 Pages) • 650 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
...