Managerial Accounting
and Control
1.Lilac Flour Meal
2.Hospital Supply Inc.
3. Moti Hera Private Ltd.
Introduction to Process costing
Process costing
Process costing is a method of costing used mainly in manufacturing
where units are continuously mass-produced through one or more
processes.
In process costing, it is the process that is costed (unlike job costing
where each job is costed separately). The method used is to take the total
cost of the process and average it over the units of production.
Process costing is adopted when there is mass production through a
sequence of several processes. Example include chemical, flour and glass
manufacturing
Direct material
Direct labour
overheads
Direct material
Direct labour
overheads
Direct material
Direct labour
overheads
Process 1
Process 2
Process 3
Finished goods
Cost of goods sold
4
Process Cost Systems
In a process cost system, costs are tracked through a series of connected
manufacturing processes or departments; used for large volume production of
uniform products
An accounting system used to apply costs:
• To similar products
• That are mass-produced
• In a continuous fashion
• Manufacturing process can be clearly segregated in to clearly identifiable
processes or departments.
Process costing is appropriate for industries: chemicals, food processing,
breweries, petroleum refining, metal manufacturing, steel making, paper
industry etc.
Process costing assumes a sequential flow of costs from one process to another
as units of output passes through a specified production process.
Process Cost Accounting System
Accounting for Process Costing
• Costs are accumulated by each process
• Each process maintains its process account
• The process account is debited with the costs incurred and
credited with goods completed and transferred to other process
account
• When the goods are completed, they will be transferred to
finished goods account
• When the goods are sold, the amount will be transferred to the
cost of goods sold account
8
Process A
Material 500
Labour 100
Overhead200
800
Process B
Process B
800
800
Process A800
Material 50
Labour 150
Overhead100
Process C
1100
Process C
Process B 1100
Material 80
Labour 110
Overhead 210
1500
1100
1100
Finished Goods
Finished Gds 1500
Process C 1500
Cost of GDs Sold
Bal c/d
1500
1500
1300
200
1500
9
Lilac Flour Meal
Processed Wheat to produce White flour (60%), Suji (10%), Wholemeal Flour (10%) and
Bran (20%)
The purchase price of wheat and operating cost up to the point of separation of end
products were treated as Joint Costs.
Packing, Selling and distribution cost incurred after the sieving stage was identified with
individual products and treated as Separable costs.
At Present: The average unit cost for each product
was arrived at by dividing the total joint costs by the
combined output of the four products.
Joint Costs
Seperable Costs
Total
Profit
Profit margin
1665000
55620
17,20,620
21,780
1.266%
Monthly Wheat Input = 900 tons
Product
White flour
Suji
Wholemeal flour
Bran
Production Production
in %
in tons
60
10
10
20
Joint Cost
allocated
on the
Joint Cost
basis of
Per Ton
production (Rs.)
quantities
(Rs.)
Separable
Total Cost Per
Costs per
Ton (Rs.)
Ton (Rs.)
78
84
34
16
1928
1934
1884
1866
Sales
Price per
Ton (Rs.)
2100
2480
2000
1140
Profit
Profit
(Loss) for
(Loss) per Total
ton (Rs.)
Output
(Rs.)
172
92880
546
49140
116
10440
-726 -130680
21780
Product
Production Production Sales Value Total Sales % of Total Joint Cost
Allocated Separable Total Cost Profit
Profit (Loss)
in %
in tons
Per ton
Value (Rs.) Sales
allocated on the Cost Per Costs per Per Ton (Loss) per for Total
(Rs.)
Value
basis of Sales ton
Ton (Rs.)
ton (Rs.) Output (Rs.)
White flour
60
540
2100 1134000 65.08 Value 1083780
2007
78
2005
15
8100
Suji
10
90
2480 223200 12.81
213300
2370
84
2454
26
2340
Wholemeal flour
10
90
2000 180000 10.33
172260
1914
34
1948
52
4680
Bran
20
180
1140 205200 11.78
195660
1087
16
1103
37
6660
900
1742400 100.00
1665000
21780
Methods of allocating the Joint Cost
1.
2.
3.
4.
5.
Net Realisable Value Method
Relative Sales Value Method
Physical Unit Method
Weighted Average Method
Profit Method
Net Realisable Value (NRV) Method
• It is based on the assumption that the processing costs incurred
subsequent to the split-off point contribute nothing to profit i.e., the
increase in the products sales value is equal to the separable costs.
Joint Costs
1665000
White flour
Selling Price per ton (Rs.)
Prodn in tons
Sales Value (Rs.)
Seperable Cost per ton (Rs.)
Total Separable Cost
NRV (Sales- Separable costs)
NRV weight
Jt Cost Allocation (NRV Approach)
Per Ton Joint Cost
2100
540
1134000
78
Suji
2480
90
223200
42120
84
7560
1091880
0.65
1077781
1996
215640
0.13
212856
2365
WholeMeal
2000
90
180000
34
Bran
1140
180
205200
Total
1742400
16
3060
2880
176940
0.10
174655
1941
202320
0.12
199708
1109
1686780
Relative Sales Value Method
• As per this method the joint cost is allocated on the basis of the market
value of the products manufactured.
• Assumption is: if a product is having higher sales price it costs more to
produce and hence market value is the basis to allocate joint cost.
Joint Costs
1665000
Selling Price per ton (Rs.)
Prodn in tons
Sales Value (Rs.)
Sales weight
Jt Cost on Sales Value (SalesValueWt X Jt Cost)
Per Ton Cost
Physical Unit Method
• On the basis of units manufactured
Joint Costs
Prodn in tons
Physical Unit Method
Output Proportion
Joint Cost on PU
Per Ton Jt Cost
1665000
White flour
540
0.6
999000
1850
Suji
90
0.1
166500
1850
WholeMeal
90
0.1
166500
1850
Bran
180
0.2
333000
1850
Total
900
Weighted Average Method
• When Products are heterogeneous, the weighted average approach can be used.
• This method by logic superior to the physical unit method as it assigns weight to each
individual product and thus recognises the unique importance of each product.
• The weight factor may be the time required to process the units, the production
procedure, Sale price, Amount of prime cost ( direct labour and direct material ) used
for each product etc.
Joint Costs
Assuming Each Product is unique
1665000
Prodn in tons
Weighted Average Method
Wheat Consumption weight
Weighted Output
Ratio
Joint Cost (Weighted Average)
White flour
540
Suji
90
WholeMeal
90
Bran
180
4
3
2
1
2160
0.77
1289032
270
0.10
161129
180
0.06
107419
180
0.06
107419
Total
900
2790
1665000
Profit Margin Method
• This method is based on the assumption that profits are earned on the
total cost incurred and not on the joint cost only.
White flour Suji WholeMeal Bran
Selling Price per ton (Rs.)
Prodn in tons
Sales Value (Rs.)
Sales weight
Jt Cost on Sales Value (SalesValueWt X Jt Cost)
Per Ton Cost
Seperable Cost per ton (Rs.)
Total Separable Cost
Joint Cost
Total Cost
Example: MMC manufactures memory modules in two step process. Chip
fabrication and module assembly. In chip fabrication, each batch of raw
silicon wafers yields 500 standard chips and 500 deluxe chips. Chips are
classified as standard and deluxe on the basis of their density ( number of
memory bits on each chip). Standard chips have 500 memory bits per chip
and deluxe chips have 1000 memory bits per chip. Joint costs to process
each batch are $24000.
In module assembly each batch of standard chips is converted in to standard
memory modules at a separately identified cost of $1000 and then sold for
$8500. Each batch of deluxe chips is converted into deluxe memory modules
at a separately identified cost of $1500 and then sold for $25000.
Q1. Allocate joint costs of each batch.
Q2. Which method should MMC use?
Q3. MMC can further process each batch to 500 standard memory modules to yield
400 DRAM products at an additional costs of $1600. The selling price per DRAM
product will be $26.
MMC manufactures
Net Realizable Value
Step I
Sale Value
Memory Bits per chip
Step 2
Sperable Cost
NRV at Split Off Pt
Total NRV of Both
products at Spilt off Pt
Joint Cost
Given
Given
Given
Standard
Delux
Total
Units Price
Value
Units Price
Value
500 $8,500 $42,50,000 500 $25,000 $125,00,000 $167,50,000
500
1000
$1,000 $5,00,000
$7,500 $37,50,000
Weightege
Joint Cost allocated
Unit Jt Cost
Total Cost per Chip
24%
$5,806
$11.6
$6,806
76%
$18,194
$18.2
$19,694
Net Realizable Value
Standard
Delux
Total
Step
I
Units Price
Value
Units Price
Value
Physical
Unit Method
Sale Value
Given
500 $8,500 $42,50,000 500 $25,000 $125,00,000 $167,50,0
Memory Bits per chip
Given
500
1000
Physical Meausres of Total Production
500
1000
Step 2
Weightage
33%
67%
Sperable
Cost
Given
$1,000 $5,00,000
$1,500
$7,50,000
Joint
CostOff
Alloted
$8,000
$16,000 $155,00,0
NRV
at Split
Pt
$7,500 $37,50,000
$23,500 $117,50,000
Total
Cost
$9,000
$17,500
Total
NRV
of Both
products
Spilt off Pt
$31,0
Unit Jtatcost
divide/no of units
$16.0
$16.0
Joint Cost
Given
$24,0
Sales Value Method
Sales Value
Sales Value Proportion
Joint Cost Allocaiton
Seperable Cost
Total Cost
Jt Cost per unit
Standard
$42,50,000
25.4%
$6,089.55
$1,000
$7,089.55
$12.18
Question 1
Question 1
Total fixed costs (TFC) = fixed costs per unit times normal volume =($660 + $770)*3,000 = $4,290,000.
Contribution margin per unit = unit price minus unit variable costs = $4,350 - $2,070 = $2,280.
Question 2
Recommendation:
Lowering
prices
reduces income. Other
factors, such as the
reduction of available
capacity
and
the
capacity and the impact
on market share, could
also affect the decision.
Government revenue = (500 * $1,795) +.125 ($1,980,000) + $275,000 = $1,420,000,
assuming the government's "share" of March fixed manufacturing costs is .125 (500/4,000).
Question 4
Minimum price = variable mfg costs + shipping costs + order costs
= $1,795 + $410 + $22,000/1,000 = $2,227
At this price per unit, the $2,227,000 of differential costs caused by the 1,000-unit order will just be
uncovered. Some students solve for this price using the break-even formula (UR = unit revenue):
TCF
UR UVC Q
22,000
UR 2,205 1,000 units
$22,000 = 1,000UR - $2,205,000
$2,227,000 = 1,000UR
$2,227 = UR
Question 6
Total revenue
Total variable manufacturing costs
Total variable marketing costs
Total contribution margin
Total fixed manufacturing costs
Total fixed marketing costs
Payment to contractor
Income
All Production
In-house
$13,050,000
(5,385,000)
(825,000)
$4,994,000 - X = $2,550,000
X = $2,444,000 or $2,444 per unit
maximum purchase price
Question 7
Contract 1,000 Regular Hoists and
Produce 800 Modified Hoists
All Production
In-house
Regular (In)
Total revenue
Total variable
manufacturing
costs
Total variable
marketing costs
Total
contribution
margin
Fixed
manufacturing
Fixed
marketing
Contractor
Income
$13,050,000
(5,385,000)
(825,000)
6,840,000
Regular (Out)
Modified
Total
$8,700,000 $4,350,000
$3,960,000 $17,010,000
(3,590,000)
(2,420,000) (6,010,000)
(550,000)
(220,000)
(440,000)
(1,210,000)
4,560,000
4,130,000
1,100,000
9,790,000
(1,980,000)
(1,980,000)
2,310,000
(2,310,000)
-$ 2,550,000
$2,950,000
$ 2,550,000
Example: ILAB manufactures design tables. ILAB has a policy of adding a 20% markup to full
costs and currently has excess capacity. Assume the cost driver for variable and fixed
manufacturing overhead costs is the number of output units. The following information pertains
to the company's normal operations per month:
Output units = 30,000 tables
Machine-hours = 8,000hours
Direct manufacturing labor-hours =10,000 hours
Direct materials per unit = Rs. 50
Direct manufacturing labor per hour = Rs. 6
Variable manufacturing overhead cos = Rs. 161,250 per month
Fixed manufacturing overhead costs = Rs. 600,000 per month
Product and process design costs = Rs. 450,000 per month
Marketing and distribution costs = Rs. 562,500 per month
ILAB is approached by an overseas customer to fill a one-time-only special order for 2,000 units. All
cost relationships remain the same except for a one-time setup charge of Rs. 20,000. No additional
design, marketing, or distribution costs will be incurred. What is the minimum acceptable bid per unit
on this one-time-only special order? For long-run pricing of the coffee tables, what price will most
likely be used by the company?
Direct materials
Direct manufacturing labor (Rs.6 x 10,000) / 30,000
Variable manufacturing (Rs.161,250 / 30,000)
Setup (Rs. 20,000 / 2,000)
Minimum acceptable bid
Rs.
Rs. 50.00
2
5.375
10
Rs. 67.38
Direct materials
Direct manufacturing labor ($6 x 10,000)/30,000
Variable manufacturing ($161,250/30,000)
Fixed manufacturing ($600,000/30,000)
Product and process design costs ($450,000/30,000)
Marketing and distribution ($562,500/30,000)
Full cost per unit
Markup (20%)
Estimated selling price
50.00
2
5.375
20
15
18.75
111.125
22.225
133.35
Moti and Heera (Private) Limited (A) & (B)
Moti and Heera (Private) Limited (A) & (B)
Bombay Poster Plant
Rs.
B-Po-1
355230.92
Less B-PO-2
107621.19
Equals B-PO-3
247609.73
Less B-PO-4A
96155.16
Less B-PO-4B
89651.49
Equals B-PO-5
61803.08
Bombay Paint Plant
Rs.
B-PA-1
206261.48
Less B-PA-2
72305.19
Equals B-PA-3
133956.29
Less B-PA-4A
32343.98
Less B-PA-4B
51502.33
Equals B-PA-5
50109.98
Bombay Commercial Department
Rs.
B-C-1
81361.56
Less B-C-2
54718.73
Equals B-C-3
26642.83
Less B-C-4A
--
Less B-C-4B
2299.83
Equals B-C-5
24343.00
Delhi Poster Plant
Rs.
D-Po-1
99898.50
Less D-PO-2
40619.18
Equals D-PO-3
59279.32
Less D-PO-4A
13608.73
Less D-PO-4B
15937.68
Equals D-PO-5
29732.91
Delhi Paint Plant
Rs.
D-PA-1
23318.21
Less D-PA-2
3866.94
Equals D-PA-3
19451.27
Less D-PA-4A
4068.32
Less D-PA-4B
5517.93
Equals D-PA-5
9865.02
Delhi Commercial Department
Rs.
D-C-1
14514.51
Less D-C-2
9883.79
Equals D-C-3
4630.72
Less D-C-4A
--
Less D-C-4B
591.66
Equals D-C-5
4039.06
Mumbai Location
Moti Heera Analysis
Alternative Choice Decisions: Differencial Costs
Mumbai
Income
Variable Cost
Contribution to Mumbai Fixed OH
Sunk Cost
Escapable Fixed Cost
Total Fixed Cost
Contributin to Local Company OH
Mumbai OH
Contribution to Company OH and Profits
Fixed Cost to Sales
Break Even
Location Cont./ Sales Ratio
Cont to Sales (P/v Ratio)
Delhi Location
Delhi
Income
Variable Cost
Contribution to Delhi Fixed OH
Sunk Cost
Escapable Fixed Cost
Total Fixed Cost
Contributin to Local Company OH
Delhi OH
Contribution to Company OH and Profits
Poster
Paint
Commercial
EX 6
EX 7
EX 8
99,899
23,318
14,516
40,619
3,867
9,884
59,280
19,451
4,632
13,608
4,068
15,938
5,518
592
29,546
9,586
592
29,734
9,865
4,040
Company OH
Company Profit/Loss
Fixed Cost to Sales
Break Even
Location Cont./ Sales Ratio
Cont to Sales (P/v Ratio)
0.30
49,791
0.30
0.59
0.41
11,492
0.42
0.83
0.04
1,855
0.28
0.32
0.29
65,632
0.32
0.61
Moti Heera Analysis
Alternative Choice Decisions: Differencial Costs
Mumbai
Income
Variable Cost
Contribution to Mumbai Fixed OH
Sunk Cost
Escapable Fixed Cost
Total Fixed Cost
Contributin to Local Company OH
Mumbai OH
Contribution to Company OH and Profits
Fixed Cost to Sales
Break Even
Location Cont./ Sales Ratio
Cont to Sales (P/v Ratio)
Delhi
Income
Variable Cost
Contribution to Delhi Fixed OH
Sunk Cost
Escapable Fixed Cost
Total Fixed Cost
Contributin to Local Company OH
Delhi OH
Contribution to Company OH and Profits
Poster
Paint
Commercial
Location Total Company TOTAL
EX 3
EX 4
EX 5
3,55,231
2,06,261
81,363
6,42,855
1,07,621
72,305
54,719
2,34,645
2,47,610
1,33,956
26,644
4,08,210
96,155
32,344
1,28,499
89,651
51,502
2,300
1,43,453
1,85,806
83,846
2,300
2,71,952
61,804
50,110
24,344
1,36,258
89,482
46,776
0.52
2,66,565
0.17
0.70
Poster
EX 6
99,899
40,619
59,280
13,608
15,938
29,546
29,734
Relevant cost for Decision Making
A relevant cost is a cost that differs between alternatives. Relevant cost, in cost
accounting, refers to the incremental and avoidable cost of implementing a business
decision.
An avoidable cost can be eliminated in whole or in part, by choosing one alternative
over another.
Avoidable costs are relevant costs. Unavoidable costs are irrelevant costs.
Relevant costs are also known as differential, or incremental costs.
When making a particular decision-relevant costs are those that may change,
depending on the decision taken. Therefore, any increase or decrease in future cash
flows as a result of a decision is an indication of relevant cost.
Examples: Types of Non-Relevant (irrelevant) Costs:
(i). Sunk Cost: Sunk cost is expenditure which has already been incurred in the past. Sunk Cost
do not affect future costs and cannot be changed by any current or future action, hence these
costs are irrelevant in decision making. Sunk cost is irrelevant because it does not affect the
future cash flows of a business.
(ii). Committed Costs: Committed costs are costs that will occur in the future, but that cannot be
changed. Future costs that cannot be avoided are not relevant because they will be incurred
irrespective of the business decision being considered.
(iii). Non-Cash Expenses: Non-cash expenses such as depreciation and amortisation are not
relevant because they do not affect the cash flows of a business.
(iv). General Overheads: If any general and administrative overheads which are not affected by
the decisions under consideration can be ignored. It depends to the situation and nature of the
business operation.
Relevant Costs for Decision Making: Following alternative decision areas
can be explored further in the context of Relevant Costing.
1.
2.
3.
4.
Make or buy decision/ To produce or to purchase?
Drop or retain a segment.
Utilization of constrained resources.
Special order.
Southwestern Company needs 1,000 motors in its manufacture of automobiles. It can buy
the motors from Jinx Motors for Rs.1,250 each. South western’s plant can manufacture
the motors for the following costs per unit:
Direct materials
Direct manufacturing labor
Variable manufacturing overhead
Fixed manufacturing overhead
Total
Rs 500
Rs 250
Rs 200
Rs 350
Rs 1,300
If Southwestern buys the motors from Jinx, 70% of the fixed manufacturing overhead
applied will not be avoided.
Required:
Should the company make or buy the motors?
Should the production line be dropped?
Vulcan swimming cloth pvt. ltd. Is considering to drop one of its product
line. A recent product income statement for the product line is as follows:
Revenue
Cost of goods sold
Gross margin
Selling and administrative expenses
Net Loss
Rs.
950,760
861840
88920
136800
(47,880)
Factory overhead accounts for 35 percent of cost of goods sold and is one third fixed.
These data are believed to reflect conditions in the immediate future.
Contribution Margin Analysis
Revenue
Variable costs of goods sold:
Total cost of
sales
Less: Fixed costs
(861,840 x 35% x 1/3 =
100,548)
Contribution margin (over variable and
fixed
costs)
Rs.950,760
861,840
100,548
761,292
Rs.189,468
Tamex Company is presently making a part that is used in one of its products. The unit product cost
is:
Direct materials .......................................................
Rs. 9
Direct labor
5
Variable manufacturing overhead ...........................
1
Depreciation of special equipment ..........................
(The special equipment has no resale value.)
3
Supervisor’s salary ..................................................
2
General factory overhead ........................................
(Common costs allocated on the basis of direct labor-hours)
10
Total unit product cost.............................................
Rs. 30
The costs above are based on 20,000 parts produced each year. An outside supplier has offered to
provide the 20,000 parts for only Rs. 25 per part. Should this offer be accepted?
Dimond Company needs 10,000 engines for the cars they are producing; they can either buy these
engines from outside suppliers or make them themselves. Here are the traditional costs for making
the product internally.
Per Unit (Rs.)
Total (Rs.)
Material
Labour
Applied Variable Costs
Total
200
100
100
400
2,000,000
1,000,000
1,000,000
4,000,000
it costs the company Rs. 400 per engine to make, however they could in fact buy the engines from
a supplier at a cost of Rs. 420 per unit. Making seems to be the best option. However, if the company
buy in the engines it can use the staff and facilities to produce another product which gives us a
contribution of Rs.50. Whether the Dimond Company should manufacture the product or should it
buy from the outsider.
Due to the declining popularity of digital watches, Sweiz Company’s digital watch line has not
reported a profit for several years. An income statement for last year follows:
Segment Income Statement—Digital Watches
Sales ......................................................................
Less variable expenses:
Variable manufacturing costs ............................
Variable shipping costs ......................................
Commissions .....................................................
Contribution margin ..............................................
Less fixed expenses:
General factory overhead*.................................
Salary of product line manager ..........................
Depreciation of equipment** ............................
Product line advertising .....................................
Rent—factory space*** ....................................
General administrative expense* .......................
Net operating loss ..................................................
Rs. 500,000
Rs. 120,000
5,000
75,000
60,000
90,000
50,000
100,000
70,000
30,000
200,000
300,000
400,000
Rs. (100,000)
* Allocated common costs that would be redistributed to other product lines if digital
watches were dropped.
** This equipment has no resale value and does not wear out through use.
*** The digital watches are manufactured in their own facility.
Should the company retain or drop the digital watch line?
Case 26-1: Import Distributors, Inc.
Import Distributors, Inc. (IDI) imported appliances and distributed them to
retail appliance stores in the Rocky Mountain States. IDI carried three broad
lines of merchandise: audio equipment , television equipment and kitchen
appliances. Each three lines accounted for about one third of total IDI sales
revenues. Although each line was referred to by IDI managers as a
“department”, until 1994 the company did not prepare departmental income
statements.
In late 1993, departmental accounts were set-up in anticipation of preparing
quarterly income statements by department starting 1994. Although in first
quarter of 1994, IDI had earned net income amounting to 4.3 per cent of
sales, the television department (TVD) has shown gross margin that is too
small to cover the department’s operating expenses:
The TVD’s poor performance prompted the company’s accountant to
suggest that perhaps the department should be discontinued. This
suggestion led to much discussion among the management group,
particularly concerning two issues:
First, was the first quarter of the year representative enough of longer
term results to consider discontinuing the TVD?
And second, would discontinuing TVD cause a drop in sales in the other
two departments?
One manager however stated that “ even if the quarter was typical and
other sales would not be hurt, I am still not convinced that we would be
better off by dropping the TVD.
Impact of Discontinuing Television Department
Forgone gross
$(189,930)
margin
Cost savings:
Personnel
$10,140
Department
12,393
Inventory taxes
37,274
Delivery costs
32,248
Sales commissions
80,621
Interest costs
23,708
Total savings
Impact on
operating profit
1,96,384
$
6,454
Tipton one stop decorators sells paint and paint supplies, carpets, and wallpapers at a single store location in
Mumbai. Al though the company has been very profitable over the years, management has seen a significant
decline in wallpaper sales and earnings. Recent figures are presented below.
Particulars
Sales
Variable Costs
Fixed Costs
Total Costs
Operating Income
Wallpaper (Rs)
1,40,000
1,12,000
45,000
1,57,000
(17,000) Loss
Tipton is studying whether to drop wallpaper business because of the changing market and accompanying loss. If
the wallpaper business is dropped, the following changes are expected to occur:
a). The vacated space will be remodelled at a cost of Rs 12,400 and will be devoted to an expanded line of highend carpet business. The sales of carpet are expected to increase by Rs 1,20,000, and the line’s overall contribution
margin ratio will rise by 5%.
b). Tipton can cut wallpaper’s fixed cost by 40%. The remaining fixed cost will continue to be incurred.
c). Customers who purchased wallpaper often bought paint and paint supplies; hence sales of paint and paint
supplies are expected to fall by 20%.
d). The firm will increase advertising expenditure by Rs. 25,000 to promote the expanded carpet business.
the division. But Why? And How?
Sales……………………..
Less: Variable costs….
Existing Contribution margin….
If wallpaper is closed, then:
Paint and
Supplies
Carpeting
Wallpaper
Rs 380,000
228,000
Rs 152,000
Rs 460,000
322,000
Rs 138,000
Rs 140,000
112,000
Rs 28,000
Loss of wallpaper contribution margin…...
Remodeling…………………………………….
Added profitability from carpet sales*……
Fixed cost savings (Rs45,000 x 40%)……….
Decreased contribution margin from paint and supplies
(Rs152,000 x 20%)……………..
Increased advertising………………………..
Income (loss) from closure…………………
* The current contribution margin ratio for carpeting is 30% (Rs138,000 ÷ Rs460,000). This ratio
will increase to 35%, producing a new contribution for the line of Rs 203,000 [(Rs 460,000 + Rs
120,000) x 35%]. The end result is that carpeting’s contribution margin will rise by Rs 65,000 (Rs
203,000 - Rs138,000), boosting firm profitability by the same amount.
Jamestown Candle works has just received a request from the Williamsburg Foundation for 800 candles
to be used in a special event for major donors. The candles will be used as the only illumination in the
reception room and will be given out as gifts to the donors as they leave. The candles will be imprinted
with the Williamsburg Foundation logo. This sale will have no effect on the company’s normal sales to
retail outlets. The normal selling price of a candle of about the size and weight of the special candles is
$3.95 and its unit product cost is $2.30, as shown below:
Direct materials
Direct labor
Manufacturing overhead
Unit product cost
$1.35
0.15
0.80
$2.30
The variable portion of the manufacturing overhead is $0.05 per candle; the other $0.75
represents fixed manufacturing costs that would not be affected by this special order.
Jamestown Candle works would have to order a special candle mold in which the
Williamsburg Foundation logo is inscribed. Such a mold would cost $800. In addition, the
Williamsburg Foundation wants a special wick containing gold-like thread that would add
$0.20 to the cost of each candle. Because of the large size of the order and the charitable
nature of the work, the Williamsburg Foundation has asked to pay only $2.95 each for this
candle. If accepted, what effect would this order have on the company’s net operating income?
Incremental revenue ............................................
Incremental costs:
Variable costs:
Direct materials ...........................................
Direct labor..................................................
Variable manufacturing overhead ...............
Special wick ................................................
Total variable cost............................................
Fixed cost:
Special mold ................................................
Total incremental cost .........................................
Incremental net operating income .......................
Per Unit
$2.95
1.35
0.15
0.05
0.20
$1.75
Total for 800
Candles
$2,360
1,080
120
40
160
1,400
800
2,200
$ 160
Ensign Company makes two products, X and Y. The current constraint is Machine
N34. Selected data on the products follow:
Selling price per unit
Less variable expenses per unit
Contribution margin
Contribution margin ratio
Current demand per week (units)
Processing time required on
Machine N34 per unit
X
$60
36
$24
40%
2,000
Y
$50
35
$15
30%
2,200
1.0 minute
0.5 minute
Machine N34 is available for 2,400 minutes per week, which is not enough
capacity to satisfy demand for both product X and product Y. Should the company
focus its efforts on product X or product Y?