Management Accounting: Please Solve The Problems

Acc202 Management Accountingplease Solve The Problems Withclear Steps

Acc202 Management Accountingplease Solve The Problems Withclear Steps

Paper For Above instruction

Introduction

Management accounting plays a vital role in aiding decision-making processes within organizations by providing relevant financial and operational information. This paper addresses a series of problems faced by Parker Ltd, a manufacturer of pens and pencils, involving cost analysis, pricing decisions, capacity considerations, and strategic supplier choices. With detailed calculations and step-by-step reasoning, the analysis explores profitability assessment, acceptance or rejection of various orders, and evaluating external supplier proposals.

Problem (a): Monthly Profit Calculation for Current Operations

Parker Ltd produces and sells 10,000 pen and pencil sets each month at a selling price of $7.50 per set. The variable costs per unit are direct material ($1.00), direct labour ($1.20), and variable overhead ($0.80). The fixed manufacturing costs total $10,000, and fixed marketing costs are $15,000.

Step 1: Calculate total variable costs per unit

Variable cost per unit = Direct material + Direct labour + Variable overhead

= $1.00 + $1.20 + $0.80 = $3.00

Step 2: Calculate total contribution margin

Contribution per unit = Selling price – Variable cost

= $7.50 – $3.00 = $4.50

Step 3: Calculate total contribution margin for 10,000 units

Total contribution = 10,000 units * $4.50 = $45,000

Step 4: Deduct fixed costs to get profit

Total fixed costs = Fixed manufacturing ($10,000) + Fixed marketing ($15,000) = $25,000

Step 5: Calculate profit

Profit = Total contribution – Fixed costs = $45,000 – $25,000 = $20,000

Answer (a): The monthly profit is $20,000.

Problem (b): Accepting a Special Order for 2,000 Sets

The educational institution offers to buy 2,000 sets at $5.50 each, with an additional logo inscribing cost of $0.60 per set.

Step 1: Calculate relevant costs for the special order

- Variable costs per set (from previous): $3.00

- Additional inscription cost per set: $0.60

- Total variable cost per set for order: $3.00 + $0.60 = $3.60

Step 2: Determine the incremental revenue

Revenue per set = $5.50

Step 3: Calculate contribution margin per unit for the special order

Contribution margin = Revenue – Variable cost

= $5.50 – $3.60 = $1.90

Step 4: Calculate total contribution from the order

Contribution = 2,000 units * $1.90 = $3,800

Step 5: Consider fixed costs

Since the order is a one-off and the current capacity can supply the order without affecting existing sales, fixed costs are unaffected, so the decision depends solely on incremental profit.

Conclusion:

Yes, accepting the order will increase profit by $3,800.

However, other factors to consider include:

- Does accepting this order affect regular sales (cannibalization)?

- Will the change impact brand or perceived quality?

- Is there enough capacity without increasing fixed costs?

Problem (c): Government Contract for 5,000 Units at $4 Each

The government offers a long-term contract with an ongoing supply of 5,000 sets at $4.00 per set, plus a one-time payment of $4,000.

Step 1: Calculate relevant costs for the contract

- Variable cost per unit = $3.00 (from part a)

- Revenue per unit = $4.00

- Total revenue from ongoing supply = 5,000 * $4 = $20,000

- Total variable costs = 5,000 * $3 = $15,000

Step 2: Assess profit or loss on the ongoing order

Contribution from variable costs = $20,000 – $15,000 = $5,000

Step 3: Consider the one-off payment

The $4,000 one-time payment adds to profit, bringing the total to $5,000 + $4,000 = $9,000.

Step 4: Decision criteria

- Since the contribution from the order exceeds variable costs, accepting the contract increases overall profit.

- Fixed costs are not explicitly allocated to this order, implying this order is likely profitable.

Conclusion:

Yes, the contract should be accepted, as it clearly adds value by covering variable costs and providing additional revenue.

Problem (d): Entry Price in Foreign Market at Max Capacity

Enter the foreign market with an additional 10,000 sets.

Step 1: Determine minimum entry price in the short term

- In the short term, incremental costs determine minimum acceptable price.

- Variable costs per set = $3.00

- Avoiding loss dictates price ≥ variable costs = $3.00

Step 2: Long-term minimum price considerations

- In the long term, all costs, including fixed costs, are relevant.

- Fixed manufacturing costs are $10,000 monthly.

- The total additional units = 10,000 sets, so the fixed costs are spread over these units if produced at capacity.

- Minimum price in long term = (Variable costs + fixed costs per unit) =

Fixed costs per unit = $10,000 / 10,000 units = $1.00

Total minimum price = $3.00 + $1.00 = $4.00

Answer:

- Short-term minimum price: $3.00

- Long-term minimum price: $4.00

Problem (e): Accepting Supply Offer at $4.20 per Set Without Facility Reuse

Supplier offers $4.20 per set, and the current variable costs are $3.00 per set. Fixed costs are $10,000, and marketing costs are $15,000, with savings of $3,000 on fixed costs and $0.40 per set off variable marketing costs if produced internally.

Step 1: Calculate cost savings if outsourcing

- Variable manufacturing costs saved: $3,000

- Savings on marketing costs: 10,000 sets * $0.40 = $4,000

- Total cost savings: $3,000 + $4,000 = $7,000

Step 2: New total costs with outsourcing

- Variable costs saved: $3.00 per set * 10,000 = $30,000

- New variable costs: $0 (since manufacturing is outsourced)

- Fixed manufacturing costs: $10,000 (not saved)

- Marketing costs: $15,000 – $4,000 = $11,000

Step 3: Financial comparison

- Cost if produced internally:

- Variable: $30,000

- Fixed manufacturing: $10,000

- Marketing: $15,000

- Total: $55,000

- Cost if outsourced:

- Payment to supplier: 10,000 * $4.20 = $42,000

Step 4: Calculation of total savings or loss

Total cost difference = Internal cost – Outsourcing cost

= $55,000 – $42,000 = $13,000 savings

Step 5: Profit impact

Outsourcing reduces costs by $13,000, so it is financially advantageous.

Decision:

Yes, outsourcing is beneficial based on cost savings, even without additional facility utilization benefits.

Problem (f): Accepting Supplier Offer with Facility Rental Revenue of $5,500

Same conditions as part (e), but now parking the facilities for $5,500 per month.

Step 1: Re-evaluate costs

- Outsourcing cost: $42,000 for 10,000 sets

- Rental income: $5,500

- Net cost after rental income: $42,000 – $5,500 = $36,500

Step 2: Cost comparison with internal production

- Internal costs as above: $55,000

- Outsourcing plus rental: $36,500

Step 3: Financial comparison

- Savings by outsourcing with rental: $55,000 – $36,500 = $18,500

Conclusion:

Accepting the supplier offer now yields even greater cost savings ($18,500) considering rental income, making outsourcing the better decision.

Conclusion

Through detailed cost analysis, contribution margin calculations, and strategic evaluations, Parker Ltd can make well-informed decisions on special orders, long-term contracts, entering foreign markets, and outsourcing options. The critical factors involve understanding relevant costs, capacity constraints, and the strategic implications beyond immediate financial considerations.

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