Accounting Accounting

Accounting

Accounting

Theassignment aims at determining the most appropriate method forintroducing a new product. END Company intends to introduce a newproduct in the market. The strategy is to identify the method thatwill have a low break-even point quantity. The method should alsohave low expense at the break even-point. The calculations andanalysis of the two methods are discussed. The quality and price ofthe final product is the same for both method 1 and method 2.

Method1

Break-evenpoint = fixed costs / contribution margin (Accounting for Management,2015)

Fixedcosts = fixed manufacturing costs + fixed selling expenses

=2,440,000 + 500,000

=$2,940,000

Contributionmargin = sales price – variable costs

Salesprice = 30

Variablecosts = raw materials + direct labor + variable overhead + sellingexpense per unit

=5 + 6 + 3 + 2

=$16

Contributionmargin = 30 – 16

=$14

Break-evenpoint = 2,940,000 / 14

=210,000 units

Sellingrevenue at break-even point = break-even units * unit sales price

=210,000 * 30

=$6,300,000

Method2

Break-evenpoint = fixed costs / contribution margin

Fixedcosts = manufacturing fixed costs + fixed selling expenses

=1,320,000 + 500,000

=$1,820,000

Contributionmargin = sales price – variable costs

Salesprice = 30

Variablecosts = raw materials + direct labor+ variable overhead + sellingexpense per unit

=5.6 + 7.2 + 4.8 + 2

=$19.6

Contributionmargin = 30 – 19.6

=$10.4

Break-evenpoint = 1,820,000 / 10.4

=175,000 units

Sellingrevenues at break-even point = break even unit * unit sales price(MyAccountingCourse.com, 2016).

=175,000 * 30

=$5,250,000

Discussion

ENDCompany should use the method that has less break even units, higherprofit margin, and minimal expenses. Based on the financial analysis,the best option for END Company is method 2. This is because method 2has fewer breakeven units and expenses. The total selling expense isdetermined by adding the fixed cost to the variable selling expensecost.

Totalselling expense = annual fixed cost + variable selling expense

Annualfixed cost = $500,000

Totalvariable selling expense = 2 * total units

Totalselling expense for method 1 = 500,000 + 2 (210,000)

=500,000 + 420,000

=$920,000

Totalselling expense for method 2 = 500,000 + 2 (175,000)

=500,000 + 350,000

=$850,000

Method2 has fewer selling expenses during the trading year. Companies aimat maximizing profit. The management, therefore, has theresponsibility of adopting strategies that minimize the recurring andfixed costs. Method 1 has a breakeven point of 210,000 units. Theselling revenue at break-even point is $6,300,000. However, method 2has break-even point of 175,000 units, and selling revenue atbreak-even of $5,250,000.

Thecompany should gradually launch new products in the market. Fewproducts are introduced in the market for customer research purposes.The research enables the company to determine the level of demand ofthe new product. The initial market research also enables the companymanagement to understand if the expectations of the customers havebeen achieved. The performance of the new product in the firsttrading period is thus closely monitored. Producing fewer products inthe first trading period is preferred. This is the reason why ENDCompany should use method 2 that develops 175,000 units, instead ofthe surplus 210,000 units produced by method 2.

References

Accountingfor Management (2015). Break-even point analysis. Retrieved from http://www.accountingformanagement.org/break-even-point-analysis/

MyAccountingCourse.com(2016). Break-Even Point. Retrieved from http://www.myaccountingcourse.com/financial-ratios/break-even-point

Accounting Accounting

Accounting

Accounting

Amy’sBoards

  1. Boards required to breakeven

Fixed Costs

Renting the store (sublet net, $7,200 – $1,600)

$5,600

Office expenses, advertising, and salaries

$26,000

Total

$31,600

Contribution Margin for each board per year:

Weekly revenue ($75 x 20)

$1,500

Cost of refurbishing ($7 x 20)

($140)

Contribution margin

$1,360

X 80% rented ($1,360 x 0.8)

$1,088

Net cost of each board ($550 – $250)

$300

Net Contribution for each board per year

$788

Break even (Fixed cost/ net contribution margin) ($31,600/$788)

40.10 ~ 40 boards

  1. The difference in the percentage of utilization is brought about by the changes in variable costs. The 50 boards will lead to an increase in variable costs for Amy, and hence, will contemplate renting fewer boards per week.

BlueSage Mountain

  1. Table with quantities between 100 to 2000 boards

Quantity (Q)

Price (p) ($530 – .2 x Q)

Total Revenue (TR)

Total Cost (TC) (FC + VC)

Profit

100

510

51,000

79,000

-28,000

200

490

98,000

88,000

10,000

300

470

141,000

97,000

44,000

400

450

180,000

106,000

74,000

500

430

215,000

115,000

100,000

600

410

246,000

124,000

122,000

700

390

273,000

133,000

140,000

800

370

296,000

142,000

154,000

900

350

315,000

151,000

164,000

1,000

330

330,000

160,000

170,000

1,100

310

341,000

169,000

172,000

1,200

290

348,000

178,000

170,000

1,300

270

351,000

187,000

164,000

1,400

250

350,000

196,000

154,000

1,500

230

345,000

205,000

140,000

1,600

210

336,000

214,000

122,000

1,700

190

323,000

223,000

100,000

1,800

170

306,000

232,000

74,000

1,900

150

285,000

241,000

44,000

2,000

130

260,000

250,000

10,000

b.Profit maximising combination (1100 boards, $310)

c.If the fixed costs fall from $70,000 to $50,000 means that Blue Sagewill record high profits on the various boards sold and force pricesto go down by an equal margin.

d.A reduction in variable costs from $90 to $50 means that the profitsfor Blue Sage will increase for each quantity sold and therefore mayprompt prices to fall by almost a similar margin.

EmrichProcessing

Opportunitycosts are in most cases positive (Gans,2014). However,in Emrich’s case, it is negative because the company can escapedisposal expenses if they consider the rush job. The $1,000 paid atfirst is termed as the sunk cost. GX-100’s opportunity cost is-$400. In other words, Emrich will raise its capital by $400 byconsidering the rush job since it will not incur the disposal fee. Pricing the special request is another challenge. The $400 disposalfee charged in the previous task is non-essential in costing thisjob. Obviously, a single element to factor in pricing the job wouldbe the reservation fee of the consumer offering the rush job. The$400 disposal charge enters the costing decision as follows: EmrichProcessing must be ready to cough up to $399 minus any privateexpenses to acquire this contract.

GasPrices

TheIraq invasion of Kuwait in 1990 was mainly aimed at taking control ofthe oil reserves. The attack had a ripple effect, that is, oilcompanies increased oil-related products as they anticipated for areduced supply. In addition, the oil companies (which operate in anoligopolistic market) wanted to maintain their supernormal profits.As a result, consumers paid a high in return as they had to part witha larger portion of their disposable income compared to the yearsbefore the invasion. Most of the oil organizations have massive crudeoil reserves. Therefore, they should sell their products to consumersat the initial price until they replenish their stock. Afterfinishing their oil reserves, it would be prudent for them to raisetheir prices in response to the increased cost per barrel caused bythe invasion.

References

Gans,J. K. S. S. R. B. (2014). Principlesof economics with student resource access 12 months.NewYork: Cengage Learning.