Review Requirements And Scoring Guide Attachments To Complet

Review Requirements and Scoring Guide Attachments to Completecreate a

Review Requirements and Scoring Guide attachments to complete! Create a 9-slide presentation in which you analyze cost accounting practices to make a recommendation about whether or not to accept a purchase offer at a lower price than normal. You may either record the presentation or write a 2-3 page supporting report. Scenario The Acme Pickle Company has distributed pickles under the "Florida's Best" brand for eight years from its production facility in Jacksonville, Florida. It sells the pickles to stores in the southeastern United States.

Acme normally produces between 8,000 and 10,000 cases of pickles a month but has the capacity to produce 12,000 cases without adding equipment or personnel. The owner of a twenty-store supermarket chain in Wisconsin, called Super Deals, visits friends in Florida and is impressed with the quality of "Florida's Best" pickles. He approaches you, an Acme Pickle account manager, with an offer to buy 2,000 cases of pickles to use in a special promotion at his stores. He is thinking of something such as: "Free jar of Florida's Best pickles with every purchase of forty dollars or more—this month only!" He offers Acme a price of $9.50 per case, knowing that it is a very substantial discount from the normal selling price of $20 a case.

Acme's management is inclined to turn the offer down, because their cost is calculated at $10.00 a case. They believe they would lose money if they sold at $9.50 a case. You, on the other hand, believe that some errors have been made in the cost accounting. Your Role You are the account manager for Acme Pickles. Review Requirements and Scoring Guide attachments to complete!

Paper For Above instruction

Introduction

The decision to accept or reject a special purchase offer at a discounted price hinges on a thorough analysis of cost accounting practices, including an accurate understanding of production costs and the potential impact on profitability. The scenario involving Acme Pickle Company presents a classic case where misinterpretation of costs may lead management to overlook profitable opportunities. This paper explores whether accepting the offer at $9.50 per case is financially viable, considering both fixed and variable costs and potential strategic benefits.

Background and Scenario Analysis

Acme Pickle Company produces between 8,000 and 10,000 cases monthly, with an operational capacity of 12,000 cases. The normal selling price is $20, but the management believes the cost per case is $10, which would imply a profit margin of $10 per case under normal circumstances. The current offer from Super Deals is $9.50 per case for 2,000 cases, a significant discount below the perceived cost.

The management’s reluctance to accept the offer stems from the apparent loss per unit since $9.50 is less than the $10 cost per case. However, the account manager suspects that the cost calculations may be flawed and that some costs might be fixed or shared costs that do not increase with the specific order.

Cost Accounting Practices and Potential Errors

Accurate cost analysis is fundamental to making sound decisions. Typically, production costs are divided into fixed and variable components, with only variable costs directly relevant for short-term special order decisions. If the $10 per case cost includes fixed costs that would be incurred regardless of order acceptance, then accepting the order may be more profitable than it initially appears.

Common errors in cost accounting include:

- Including fixed costs in the unit cost calculation for short-term decisions.

- Failing to distinguish between sunk or unavoidable costs and incremental costs.

- Overestimating the total costs by averaging fixed costs over a smaller volume, leading to inflated per-unit costs.

By reassessing the true variable costs, it may be revealed that accepting the order at $9.50 could yield a contribution toward fixed costs and potentially contribute to overall profitability, especially given excess capacity.

Analysis of Incremental Costs and Capacity

The company’s capacity to produce 12,000 cases indicates unused capacity of 2,000 cases. Therefore, producing an additional 2,000 cases to fulfill the order would not require additional resources or costs if the plants are operating below capacity. This implies that fixed costs are likely already covered and that variable costs primarily include direct materials, direct labor, and variable manufacturing overhead.

Assuming variable costs per case are less than $10, then accepting the order at $9.50 would actually increase contribution margin. For example, if the variable cost per case is $7, then the contribution margin per case is $2.50, and accepting the order would generate an additional $5,000 in contribution margin ($2.50 x 2,000 cases). This contribution could help offset fixed costs or improve overall profitability.

Strategic and Financial Implications

Accepting the discount offer at a price slightly below the total cost might seem counterintuitive, but it’s justified if the incremental costs are minimal and capacity is available. Strategic benefits include strengthening relationships with a key supermarket chain, gaining market exposure, and potentially increasing future sales volume.

However, risks include potential damage to pricing strategies if customers come to expect similar discounts regularly. It is crucial to verify the actual variable costs and confirm capacity constraints before making the decision.

Conclusion and Recommendation

Considering the capacity constraints, potential misestimation of costs, and strategic benefits, it is advisable for Acme Pickle to reevaluate its cost accounting process. If the variable costs are indeed below $9.50, accepting the order will be profitable and contribute positively to fixed costs and margins. Nonetheless, a detailed cost analysis should be conducted to confirm variable costs accurately.

Given the information, the recommended course of action is to accept the order at $9.50 per case, provided the true variable costs are less than this price, as the contribution margins would be positive, and capacity exists to absorb this order without affecting regular sales.

References

• Drury, C. (2018). Management and Cost Accounting (10th ed.). Cengage Learning.
• Horngren, C. T., Datar, S. M., & Rajan, M. (2019). Cost Accounting: A Managerial Emphasis (16th ed.). Pearson.
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• Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting (16th ed.). McGraw-Hill Education.
• Lockamy III, A. (2017). Strategic cost management: Improving organizational competitiveness. Journal of Business Strategy, 38(1), 52-59.
• Hilton, R. W., & Platt, D. E. (2019). Managerial Accounting: Creating Value in a Dynamic Business Environment (11th ed.). McGraw-Hill Education.
• Anthony, R. N., & Govindarajan, V. (2019). Management Control Systems (13th ed.). McGraw-Hill Education.
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