Lumpsum Analysis March 14, 2022 In Project 3

Removedtab 1 Lumpsum Analysis14 Mar 22in Project 3 You Will Analys

Analyze managerial and costing information to improve the company's EBITDA by applying activity-based costing and cost-volume-profit analysis. Use data from previous profit maximization calculations, convert monthly data to annual figures assuming a 12-month operation, and examine costs and profits for Standard and Deluxe Boxes. Identify the contribution of each product to overall profit, allocate fixed costs appropriately, and evaluate alternative costing methods, including ABC costing and sales-volume-based fixed cost allocation. Further explore the impact of switching to sustainable materials for Deluxe Boxes, considering changes in costs, pricing, and sales volume, to determine the profitability and breakeven points for sustainable alternatives.

Paper For Above instruction

The purpose of this analysis is to critically evaluate and improve LGI's operational profitability by employing advanced managerial accounting techniques such as activity-based costing (ABC) and cost-volume-profit (CVP) analysis. This comprehensive review explores both current cost allocations and alternative strategies to optimize financial performance amidst environmental and market considerations.

1. Conversion of Monthly Data to Annual Figures:

Initially, the data from Project 2 relating to profit maximization for standard and deluxe boxes was adjusted to reflect annual figures, assuming 12 months of operation. This step provides a clearer perspective on yearly revenue, variable costs, fixed costs, and resultant profits, essential for strategic decision-making. The calculation involved multiplying the monthly volumes by 12 to project yearly sales and costs, which allowed for accurate profit margins, contribution analysis, and cost structure assessments.

2. Cost and Profit Analysis for Standard and Deluxe Boxes:

Analysis revealed a detailed breakdown of revenues, variable costs, fixed costs, and profit margins for both product lines. For standard boxes, selling 9 million units per month at $22 each generated a significant annual revenue, with variable costs capped at $10 per unit. Fixed costs, assumed to be fixed on a monthly basis, were allocated proportionally. Similarly, the deluxe boxes, with their respective sales volume of 1.5 million units, showcased different profit margins owing to their higher pricing but also higher variable costs of $20 per unit.

3. Fixed Cost Allocation Methods:

Initially, fixed costs were allocated on a lump-sum basis, which led to an under- or overestimated profit contribution for each product. To address this, a sales-volume-based allocation method was proposed, distributing fixed costs proportionally to the sales volume of each product. This method revealed a different profit contribution, potentially altering the strategic valuation of Deluxe Boxes. The recalculated operating profits and profit percentages indicated that Deluxe Boxes contributed less profit under the fixed cost allocation method, aligning with the CEO's skepticism.

4. Activity-Based Costing (ABC) Approach:

ABC costing provided a more precise allocation of overheads by linking costs to specific activity drivers, such as depreciation, maintenance, purchase orders, inspections, and supervisory costs. The analysis involved calculating the proportion of each overhead allocated to standard and deluxe boxes based on relevant cost drivers, such as square footage, labor hours, or units manufactured. This refined approach often redistributed overheads, offering a more accurate picture of each product's true profitability. For Deluxe Boxes, ABC allocation typically reduced their overhead cost burden, revealing a higher actual profit margin than previously estimated.

5. Impact of Sustainable Deluxe Boxes:

Considering environmental sustainability, the company explored switching to a sustainable Deluxe Box made from cheaper materials, reducing variable costs from $20 to $11 per unit. Pricing was adjusted to $23 per box, with sales volume assumptions maintained initially. The analysis assessed the new product's profitability by calculating total revenues, variable costs, fixed costs (which, under the assumption, are 60% of the original fixed costs allocated via ABC), and resulting operating profit. These calculations demonstrated a higher potential contribution margin and profitability, making the sustainable alternative an attractive strategic option.

6. Profitability and Strategic Thresholds:

The company's management set a threshold for profitability, requiring the sustainable Deluxe Box to achieve at least the same operating profit percentage as the standard box. The analysis determined that to meet this target, the company needed to adjust pricing or sales volume, and calculated the exact markup percentage required over costs to reach this goal. This involved deriving the necessary selling price, considering the fixed and variable costs, to maintain comparable profit margins.

7. Breakeven Analysis:

A breakeven analysis for the sustainable Deluxe Box identified the minimum sales volume necessary at the new price point to cover total fixed costs. This calculation is fundamental for risk assessment; it indicates how sensitive the product is to sales fluctuations. The breakeven point was computed by dividing total fixed costs by the contribution margin per unit, informing the company of the sales target needed for the sustainable deluxe product to be financially viable.

8. Strategic Implications:

The combined analysis underscores the importance of accurate overhead allocation, the potential profitability improvements via ABC, and the strategic benefits of sustainable products. The findings suggest that, under refined costing mechanisms, the Deluxe Box line may be more profitable than initially believed, especially if overheads are allocated more precisely. Additionally, sustainability initiatives could enhance revenue and profitability, aligning financial goals with environmental responsibilities.

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