ACC00724 Accounting For Managers - Questions/Answers Assignment Solution

Answer 1:

Pacific Telemet Ltd manufacturers high-end smart phone, with their target market on a business executive who travels overseas. They are facilitated with Dual-Sim option of the phone. During a recent meeting Board of Directors have pressured the CEO to increase the profitability from last year, and the CEO has asked its manager for suggestions, three proposals were presented, production manager presented Proposal A, Sales Manager proposed Proposal B, and finally Proposal C was suggested by Marketing Director.

	Last Year	PROPOSAL A	PROPOSAL B	PROPOSAL C
Sales	12,000	15,600	10,560	14,000
Selling Price	$ 460	$ 460	$ 520	460
Total Revenue	$ 5,520,000	$ 7,176,000	$ 5,491,200	6,440,000
Variable Manufacturing Cost	$ 184	$ 220	$ 184	184
Fixed Manufacturing Cost	$ 2,208,000	$ 3,432,000	$ 1,943,040	2,576,000
Fixed Cost	$ 360,000	$ 360,000	$ 360,000	360,000
Variable Sales Admin Cost	$ 36	$ 36	$ 36	36
Total Variable Sales Admin Cost	$ 432,000	$ 561,600	$ 380,160	504,000
Fixed Sales Admin Cost	$ 600,000	$ 600,000	$ 600,000	600,000
Advertisement Campaign		$ 60,000	$ 120,000	50,000
Rebate				100,000
Total Cost	$ 3,600,000	$ 5,013,600	$ 3,403,200	4,190,000

Profit	$ 1,920,000	$ 2,162,400	$ 2,088,000	2,250,000


Profit Ratio	35%	30%	38%	35%
Break Even Units	4,000	5,000	3,600	4,208
Break Even in Amount	$ 1,840,000	$ 2,300,000	$ 1,872,000	$ 1,935,833
Contribution per unit	$ 240	$ 204	$ 300	$ 240
Contribution per unit	52%	44%	58%	52%
Margin of Safety Unit	8,000	10,600	6,960	9,792
Margin of Safety %	67%	68%	66%	70%
Margin of Safety Dollar	$ 3,680,000	4,876,000	3,619,200	4,504,167

We will now discuss and analyze all three proposals in-depth.

Proposal A:

Mr. David Groate, Production Manager suggested that product quality should be increased and it will increase the variable cost by $36 landing the final variable manufacturing cost to $220 and reducing contribution per unit from $240 to $204. Reduction of contribution per unit has a direct impact on achieving break even. He also suggested that an additional $60,000 should be spent on national advertising which will result in the sales to boost up by 30%. Increased sale of 3600 unit increases the profitability by 13% as compared to last year. However, the profit ratio is dropped by 5%, making this scenario a high profit, high expense scenario, with no change to the selling price. The margin of safety is $48,76,000 giving a huge margin if the results of advertising do not give the expected result. In this whole scenario, the company has to do sales of 5000 units to achieve break even.