Assignment Description With The Help Of Your CFO

Assignment Descriptionwith The Help Of Your CFO You Have Put Together

Given the preliminary budget figures based on last year's data for a planned production and sales level of 4,000 units annually, analyze the cost structure related to various expense categories. Determine which costs are variable, fixed, or mixed, and perform breakeven and profit target calculations using the provided data. Additionally, assess the impact of an added administrative expense on sales volume requirements. All calculations will be documented in a comprehensive Excel worksheet.

Paper For Above instruction

Analyzing the cost structure of a manufacturing business is essential for strategic planning, pricing, and profitability analysis. For this purpose, the provided budget data—based on last year's performance—offers insights into the nature of costs involved in producing and selling 4,000 units annually. A thorough understanding of whether these costs are variable, fixed, or mixed helps in decision-making, especially when forecasting profits or determining breakeven points.

Identification of Cost Types

Variable costs change directly with the level of production volume. Fixed costs, however, remain constant regardless of production output within a certain range, and mixed costs contain elements of both. Based on the provided data:

  • Building depreciation ($200,000/year): Fixed. Depreciation expense is scheduled and does not fluctuate with production levels within the scope of this analysis.
  • Machine operators ($100,000/year): Fixed. Salaries for operators are typically fixed unless there are overtime or shift-based adjustments, but for this analysis, assume fixed.
  • Management staff ($400,000/year): Fixed. Management salaries are generally fixed expenses.
  • Direct materials ($4,000,000/year): Variable. Material costs generally vary with production volume, making this expense variable.
  • Other expenses that seem to vary based on production levels ($3,000,000/year): Variable. These costs change with output levels, as suggested by their description.
  • Other expenses that don't seem to vary ($1,300,000/year): Fixed. These expenses remain consistent regardless of production volume.
  • Utilities: Utility costs are mixed. Using the high-low method data, we can estimate the fixed and variable components.

Estimating Utility Costs Using the High-Low Method

The high-low method relies on the highest and lowest activity levels to determine variable and fixed costs. When no production, utility costs are $20,000/month; at 4,000 units/month, utility costs are $40,000/month. Calculations:

  • Activity level difference: 4,000 units - 0 units = 4,000 units
  • Cost difference: $40,000 - $20,000 = $20,000
  • Variable utility cost per unit: $20,000 / 4,000 units = $5 per unit
  • Fixed utility costs: At zero production, fixed utility costs are $20,000/month.

Calculations of Contribution Margin and Breakeven Point

The contribution margin per unit is the selling price minus variable costs, which include direct materials, variable utilities, and any other variable expenses (assumed only those specified). For simplicity, assume that all variable costs (materials, utilities, and other variable expenses) are accounted for in their respective categories.

Given only direct materials and utilities are variable, total variable cost per unit:

  • Direct materials: $4,000,000 / 4,000 units = $1,000 per unit
  • Variable utilities: $5 per unit
  • Total variable costs per unit: $1,000 + $5 = $1,005

Selling price per unit: $5,000

Contribution margin per unit: $5,000 - $1,005 = $3,995

Contribution margin percentage: ($3,995 / $5,000) * 100 = 79.9%

Breakeven sales volume in units: Total fixed costs / contribution margin per unit

Fixed costs include fixed expenses such as building depreciation, management, fixed utilities, and fixed other expenses:

  • Building depreciation: $200,000
  • Management staff: $400,000
  • Fixed other expenses: $1,300,000
  • Fixed utilities: $20,000 per month x 12 = $240,000

Total fixed costs: $200,000 + $400,000 + $1,300,000 + $240,000 = $2,140,000

Breakeven units = $2,140,000 / $3,995 ≈ 536 units

Profit Target Analysis

To determine the number of units required to achieve a $10,000/month profit:

Desired monthly profit: $10,000

Total fixed costs per month: (Annual fixed costs / 12) = $2,140,000 / 12 ≈ $178,333

Total contribution needed per month: Fixed costs + profit = $178,333 + $10,000 = $188,333

Required units per month: $188,333 / $3,995 ≈ 47 units

Sales dollars: 47 units × $5,000/unit = $235,000

Impact of Added Administrative Expense

In Year 2, an additional $300,000 annual expense for administrative salaries is planned. To cover this expense in addition to fixed costs, the extra contribution margin required is $300,000 annually or about $25,000 monthly.

Additional units needed: $25,000 / $3,995 ≈ 6.3 units, rounded to 7 units.

Additional sales dollars: 7 units × $5,000 = $35,000.

Thus, to just cover the added expense, the firm must sell at least 7 more units monthly beyond the breakeven volume.

Conclusion

This detailed analysis underscores the importance of understanding cost behavior for strategic decision-making. Recognizing fixed, variable, and mixed costs facilitates more accurate breakeven and profit planning. The utility costs' estimation via the high-low method allowed a clearer understanding of their mixed nature, guiding appropriate managerial responses. The impact of additional expenses illustrates how incremental costs influence sales requirements, emphasizing the need for precise cost control and sales forecasting to maintain profitability in a competitive environment.

References

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  • Horngren, C. T., Sundem, G. L., Stratton, W. O., Burgstahler, D., & Schatzberg, J. (2019). Introduction to Management Accounting (16th ed.). Pearson.
  • Hilton, R. W., & Platt, D. (2019). Managerial Accounting: Creating Value in a Dynamic Business Environment. McGraw-Hill Education.
  • Drury, C. (2018). Management and Cost Accounting (10th ed.). Cengage Learning.
  • Anthony, R., & Govindarajan, V. (2018). Management Control Systems (13th ed.). McGraw-Hill Education.
  • Kaplan, R. S., & Atkinson, A. A. (2019). Advanced Management Accounting. Pearson.
  • Blocher, E., Stout, D. E., Juras, P. E., & Cokins, G. (2019). Cost Management: A Strategic Emphasis (8th ed.). McGraw-Hill Education.
  • Siegel, G., & Shim, J. K. (2018). Budgeting, Financial Statement Analysis, and Valuation (2nd ed.). Cambridge University Press.
  • Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2020). Managerial Accounting (10th ed.). Wiley.
  • Anthony, R. N., & Govindarajan, V. (2019). Management Control Systems (12th ed.). McGraw-Hill.

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