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You are the manager in Bright company that produces paper bags for food shops and supermarkets.

Individual assignment TACC507NA

Read the three cases and provide solutions to the case questions.

Case 1 Cost-Volume-Profit (CVP) analysis + marginal analysis

You are the manager in Bright company that produces paper bags for food shops and supermarkets. You are provided with following information:

Ÿ   Bright company is able to produce 100,000 packs of bags.

Ÿ   Its current sale volume is 80,000 packs of bags per year. This has achieved its maximum sale force.

Ÿ   Current selling price is $20 per pack of bags.

Ÿ   Variable costs in total are $400,000;

Ÿ   Fixed costs are $ 160,000.

A newly established shop has approached you, informing a willingness of purchasing 15,000 packs of bags per year at a price of $10 for each bag. If this proposal is accepted, unit variable costs would remain the same however fixed costs would increase by $60,000 per year.

Required:

(1)   Discuss whether this proposal is worthwhile from a financial point of view.

(2)   Analyze, if your competitor in the paper industry knows the above cost and price information, what action(s) may the competitor take to beat you in the market.

Case 2 Activity-based Costing (ABC) vs. Time-based Costing

Hello company manufactures three products, A, B and C. Forecast data concerning overheads (indirect costs) of the products for the next period as follows.

 

A

B

C

Forecast output (units)

50

60

80

Machine hours per unit

4

3

2

Number of customer orders

8

10

12

Number of quality control inspections

15

20

25

Number of engineering consultancies

8

7

5

Areas of workshops (m2)

3,000

4,500

2,500


Cost pools and related cost drivers

Cost pool $                                 Cost driver

Machine operating 27,000                           Machine hours

Order processing 6,000                          No. of customer orders

Quality control 3,000                        No. of quality control inspections

Engineering consultancy 2,000                  No. of engineer consultancies

Rent of the campus 10,000                        Areas of workshops

Required

Calculate the overhead cost to be absorbed by each of the products using the following absorption costing methods.

(1)   A traditional absorption method based on a machine hour rate.

(2) An activity-based method, using the relevant cost drivers to trace overhead costs to the individual products.

Case 3: Flexible budgets and variance analysis

Mary is a principal of a school which provides education and accommodation for students. The school secretary prepared the following summary of costs for 2018, including a column showing the original budget for 2018.

The School – cost analysis

2018 budget

2018 actual

Number of students

200

180

 

Fixed costs

 

 

 

     Utilities

$ 60,000

$ 64,000

     Janitorial services

40,000

  38,000

     Repairs and maintenance

  32,000

  28,000

     Salaries for non-convent employees

 180,000

190,000

        Total fixed costs

312,000

 320,000

 

Variable costs

 

 

     Food

1000,000

920,000

     Clothing

   90,000

  82,000

     Laundry & Linen Service

   30,000

  25,000

     Educational costs

   60,000

  52,000

     Allowances

   50,000

  48,000

         Total variable costs

1,230,000

1,127,000

 

Total Costs

 

1,542,000

 

1,447,000


Mary is pleased that total costs were below budget for the year, but she wonders if this is partly due to the fact that the school enrolled fewer children than expected for the year.  

Required:

(1)   Prepare a flexible budget for 2018, based on the number of children actually enrolled in 2018.

(2)   Should Mary be satisfied with the school’s cost management in 2018? Explain.


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