Re: Decision making with contribution per limiting factor

Discussion in 'Accounting' started by simo, Dec 23, 2004.

  1. simo

    simo Guest

    --
    Mohamed el Faghloumi
    "simo" <> schreef in bericht news:...
    > Would anybody help solve this case: (for school) ....awfull thanks!
    >
    > Key topics: Decision making with contribution per limiting factor
    >
    > Merrion Products Ltd. was incorporated and commenced to trade in 20x1. Its
    > several shareholders consisted of members of the Carroll family. The
    > business was devoted to the import of a raw material substance which was
    > slightly refined to Irish tastes and sold to various customers around the
    > country. During the initial years of production, product "A" was the only
    > product manufactured and the profits were adequate to satisfy the family
    > shareholders. During the 20x0's it was decided to introduce new products
    > based on the same raw material but refined in different ways. In 20x3,
    > product "B" was introduced and product "C" was added the following year.
    > Both products were an immediate success and the entire production output

    for
    > both products was sold by the end of the year. In fact demand for all
    > products constantly outstripped production. Encouraged by this success,
    > product "D", based on the same raw material was introduced into the

    product
    > range last year after extensive research on customer tastes. It was
    > considered by all family members to be as equally successful as the other
    > three products.
    >
    > According to the audited financial statements Merrion Products Ltd. was a
    > profitable company with an excellent cash flow. The various family members
    > concentrated mainly on the administrative and selling side of the

    business.
    > Each family member was entitled to a basic salary which was supplemented

    by
    > a share of total sales commission. The sales commission was calculated at
    > the rate of 10% of sales price on every unit sold. Thus each family member
    > would participate in the overall success of his firm. The Carroll family
    > believed that the company's profitability was mainly attributable to two
    > factors. First, was the high quality of its products with guaranteed
    > delivery dates. Michael Carroll, the managing director of the firm, often
    > boasted that the number of customer complaints in any one year could be
    > counted on the fingers of one hand. The second reason was due to subtle
    > marketing and presentation so that each product was perceived by the

    public
    > as different and was sold to different types of customer. In other words

    the
    > products were not considered complementary and had their own unique brand
    > loyalty. Thus the sales of one product could fluctuate without affecting

    the
    > sales of the other products, or the refusal of orders for one product

    would
    > not lead to the cancellation of orders for the others.
    >
    > Each product was produced from the same basic raw material which was
    > imported from abroad. Until recently this raw material was available in
    > unlimited quantities and was purchased by Merrion quarterly in advance as
    > required. However recent political instability in the exporting country
    > resulted in a severe restriction on the availability of this raw material.

    A
    > recent fact finding visit to the exporting country only served to confirm
    > the restricted availability of the imported raw material in the

    forthcoming
    > year. On his return home Michael Carroll called a directors meeting to
    > discuss the problem and its impact on the budget for the forthcoming
    > quarter.
    >
    > Una Carroll, the only daughter in the family, filled the role of company
    > accountant. After obtaining a business studies degree at college she
    > immediately joined the family firm. She was mainly concerned with
    > maintaining the basic financial accounting records and keeping control

    over
    > accounts receivable and payable. She also monitored progress towards

    agreed
    > budget targets. However the budget setting process for each quarter was
    > unsophisticated in that output levels were determined by amiable consensus
    > among family members. Preference was usually given to the highest price

    item
    > since this procedure maximised sales commission for the family members.

    Una
    > tried to persuade the other members of the family that there was a more
    > scientific method available to determine best production plans. However
    > whenever she mentioned the phrase "profit maximisation" in discussion her
    > family always retorted "But that's only theory Una and has got nothing to

    do
    > with practice". Being the youngest in the family Una felt she lacked a

    great
    > deal of authority and credibility.
    >
    > The Carroll family felt that the business did not need a management
    > accountant since they considered the overall operations to be fairly

    simple.
    > Neither did they require the services of a production manager or a

    marketing
    > manager since they could virtually sell everything they produced. Una knew
    > from experience that as long as budgeted profit was higher than last year
    > then everyone was happy. Generally, the actual financial performance met

    the
    > budget targets pretty well.
    >
    > At the start of the meeting Michael Carroll relayed to participants

    details
    > of his foreign trip. He explained, "Unfortunately our worst suspicions

    have
    > been confirmed. I saw things at first hand and also had discussions with

    our
    > Embassy officials. I made direct contact with our usual supplier and he
    > indicated that he will be unable to delivery more than 72,000 euros of raw
    > materials per quarter until conditions improve and that's not going to be
    > for some time. The basic problem, he tells me is that the material is

    simply
    > not available in his country due to the current political situation. Since
    > my return home I have made extensive enquiries regarding possible
    > alternative suppliers of the same raw material in other countries. There
    > just isn't any which we could tap at this short notice. Like many simple
    > problems, its insoluble in the short-term. We've just got to accept it for
    > now!"
    >
    > Una interrupted: "I expect that our budgets for the next quarter shall

    have
    > to be revised - downwards and our profits shall be considerably depressed

    as
    > a result." She circulated the previously agreed budget and supporting
    > schedules for the forthcoming quarter to participants (Exhibits 1 and 2).
    >
    > EXHIBIT 1 Budget for the quarter ending 31 March 20x7
    >
    > Euros
    >
    > Budget sales 200,000
    >
    > Cost of production 149,500
    >
    > Gross margin 50,500
    >
    > Administration expenses 19,900
    >
    > Distribution expenses 5,700
    >
    > Sales commission 20,000
    >
    > Financial expenses 800 46,400
    >
    > Budgeted Net Profit 4,100
    >
    > EXHIBIT 2 Schedule of Revenue and Production Costs per Product.
    >
    > Product
    > A
    > B
    > C
    > D
    >
    > Sales price
    > 20
    > 40
    > 30
    > 20
    >
    > Direct material (imported)
    > 7
    > 16
    > 13
    > 10
    >
    > Direct labour and packing
    > 3
    > 4
    > 6
    > 4
    >
    > Production overhead
    > 4
    > 5
    > 6
    > 5
    >
    > Budget sales (units)
    > 1,500
    > 2,000
    > 2,000
    > 1,500
    >
    >
    >
    >
    > NOTE: Production overhead includes both fixed and variable expense. The
    > estimated fixed overhead for the forthcoming quarter amounts to 20,000

    euros
    > and has been apportioned to each product on the basis of total anticipated
    > sales revenue for each product.
    >
    > Una continued "In my opinion there is no scope for any reduction in costs.
    > We can't change, at least in the short term, our direct material costs.
    > Neither can we change our packaging costs. Our direct labour consists of

    the
    > part-time assembly workers which we need in order to produce. Likewise
    > variable overheads will be incurred if we want to produce and our fixed
    > overheads are already down to an absolute minimum. Commission is the only
    > thing that we could effectively cut."
    >
    > Michael Carroll interjected. "No, I recommend that the sales commission be
    > left alone. We're all in this venture together and I reckon we're going to
    > have to sell our way out of our problems. We need to retain the incentive

    to
    > sell and keep our selling prices intact."
    >
    > Everyone agreed. Patrick Carroll, the eldest member of the family, who was
    > chiefly responsible for sales, raised the possibility of maximum sales
    > levels of each product. He said, "We must take into
    >
    > consideration that there is a definite limit on the amount of goods which

    we
    > can sell at existing prices next quarter."
    >
    > Michael Carroll accepted that the point was valid. After much discussion

    all
    > family members agreed that maximum sales value of each product at current
    > prices for the forthcoming quarter would be as follows:
    >
    > Product Euros
    >
    > A 60,000
    >
    > B 88,000
    >
    > C
    >
    > 63,000
    > D 40,000
    >
    >
    >
    > Subsequently everyone at the meeting realised that due to the definite
    > shortage of raw materials it was not possible to produce simultaneously

    all
    > these quantities. Michael Carroll added "I think we shall have to be more
    > selective in what we produce in future. However, I recommend that we

    produce
    > a minimum of 1,000 units of each product during the forthcoming quarter.
    > This would, at least, keep the company's products in the minds of the

    public
    > and satisfy our major customers. Its important to do this. Any remaining
    > materials should be used in the most profitable manner. Una, now is the
    > ideal time to put some of that theory of yours into practice. If you feel
    > that there is a single, best way to utilise our production facilities in
    > these circumstances now is the ideal time to let us know."
    >
    > Requirements
    >
    > 1. 1. Prepare a statement showing the most
    > profitable production plan for Merrion Products Ltd. for the forthcoming
    > quarter. Prepare a detailed profit and loss account to accompany your
    > recommendation. Explain your workings.
    >
    > 2. 2. Calculate the firm's break-even point for

    the
    > forthcoming quarter. What fundamental assumptions have you made?
    >
    > 3. 3. What is the "opportunity cost", if any,
    > associated with the minimum production of 1,000 units of each product?
    >
    > 4. 4. Assuming it was possible to increase all
    > selling prices by 7 euros per unit without influencing demand, would this
    > price increase effect your analysis. Explain.
    >
    >
    > --
    > Simo
    >
    >
     
    simo, Dec 23, 2004
    #1
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  2. simo

    sam

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    Help needed

    HELP... can anyone solve this problem please?!
     
    sam, Nov 11, 2009
    #2
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  3. simo

    Karolina

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    Hello
     
    Karolina, Feb 28, 2015
    #3
  4. simo

    Karolina

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    I have the same question, and dont know how to solve this problem. Do you know the answer?
    Thank you
     
    Karolina, Feb 28, 2015
    #4
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