Unit VIII PowerPoint Presentation

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Abstract

The contributing margin is used to compare the performance of different products and

determine if they are profitable or not. It used in determining the products to put emphasis on

and the product to do away with. The present value is used to determine the current value of a

future sum of money today at a specific rate of return. It is used to determine if an investment is

worth investing. Variance is used to determine the difference between standard and actual costs

incurred in production. When the variance is unfavorable, the cost of production is higher than

the standard cost while when the variance is favorable, the cost of production is lower than the

standard cost.

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Cookie Business Final Project

Contribution margin is the difference between revenue and variable costs (sales

revenue- variable costs) this takes into account the net income which is obtained from net sales,

variable costs, and fixed costs (Gutiérrez, 2021). The break-even point is the number of units the

business needs to sell to cover fixed cost. The weighted average contribution margin is the

average amount that a group of products contribute to paying the fixed costs of a business. The

variance in production is used to determine the deviation of cost incurred of production from

the standard cost. This is important in developing ways to improve production and reducing

wastage.

Material price variance is the difference between the standard price and the actual price

for the actual quantity of material used in production. The material price variance is favorable

when the standard material cost is higher than the actual material cost.

Part 1 Contribution Margin/Breakeven

Cookie Business   Chocolate Chip Sugar Specialty Total

Units Sold 1,500,000 980,000 300,000 2,780,000 Sales $ 1,875,000.00 $ 882,000.00 $ 1,050,000.00 $ 3,807,000.00 Less: Variable Costs $ 690,000.00 $ 205,800.00 $ 81,000.00 $ 976,800.00 Contribution Margin $ 1,185,000.00 $ 676,200.00 $ 969,000.00 $ 2,830,200.00 Less: Common Fixed Costs $ 125,000.00 Profit $ 2,705,200.00 Per item Contribution Margin 0.79 0.69 3.23 Weighted Average Contribution Margin

1.018

Break-even point in units 959,474

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Data in business is used to make decisions. The number of sales made determine the

demand while contribution margin determines if a product is profitable which is easily

calculated using the contribution margin formula. Diversification is important in business

although having products that does not generate cash flow can lead the business to bankruptcy.

This makes contribution margin important. Products with low contribution margin means they

are not performing well and the business owner can remove it from the production line. The

business owner can also decide to promote another product that is generating a high

contribution margin.

Contribution margin = net sales- variable cost

Contribution margin per unit= (net sales-variable cost)/number of units sold.

Per unit contribution margin helps to compare the different products where in our case

specialty has the highest contribution margin then chocolate chips and lastly sugar meaning

specialty generates the highest profit and then chocolate chips while sugar generates the least

profit. The weighted average contribution margin is the average amount that a group of

products contribute to paying the fixed costs of a business. This is used in breakeven analysis.

Weighted average contribution margin= total of (contribution margin for each product*number

of units sold)/total number of unit sales.

The products had a weighted average contribution margin above one which means the

business is profitable and is paying the fixed costs. The break-even point is the number of units

the business needs to sell to cover fixed cost as explained by Gutierrez, & Dalsted, (1990). Which

failure to cover them the business results in negative net profit and negative contribution

margin. Break-even point= fixed costs/per-unit contribution margin. The company break-even

point is 959,474 units.

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Part 2 Full and Variable Costing

Cookie Business

Productions Costs: Direct material $ 0.60 Direct labor $ 1.00 Variable manufacturing overhead $ 0.40

Total variable manufacturing costs per unit $ 2.00

Fixed manufacturing overhead per year $ 139,000.00 In addition, the company has fixed selling and administrative costs:

Fixed selling costs per year $ 50,000.00

Fixed administrative costs per year $ 65,000.00 Selling price per cookie $ 3.75 Number of cookies produced 2,780,000 Number of cookies sold 2,600,000 Full (absorption) costing : Full cost per unit $ 2.09 Ending Inventory Full (absorption) costing $ 376,446 Variable costing : Variable cost per unit $ 2.00 Ending Inventory Variable costing $ 360,000

Absorption costing is used in inventory valuation and calculating the cost of the product

in companies where all the expenses incurred by the company are taken into consideration. The

full absorption costing is obtained by adding up all the costs incurred in the production process

and allocating them to the products individually as stated by Nawaz, (2013).

Full absorption cost = direct labor cost per unit+direct material cost per unit+variable

manufacturing overhead cost per unit+fixed manufacturing overhead per unit. This gives the

total cost of producing each product. The ending inventory full absorption costing is the

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number of goods left as inventory in the company multiplied with the full absorption cost per

unit.

The variable cost per unit only considers the variable cost of production which include

direct labor cost per unit, direct material cost per unit and variable manufacturing overhead cost

per unit. This cost is used in determining the per unit cost of production and amount of

inventory cost left at the end of a period.

Part 3 Special Order

Cookie Business Number of cookies needed 1,000 Discounted price per cookie $ 2.75 Normal price per cookie $ 3.75 Cost of special printed design per cookie $ 0.50 Cost of tool needed to make the design $ 100.00 Revenue for special order $ 2,750 Costs for special order: Design cost $ 600

Tool cost $ 2,691 Net increase (decrease) in profit $ 59

The special order has a cost of production of $2.09 with an additional cost of design

which makes the cost of production of the 1,000 products to be $2,691. The net revenue from

sales of the 1,000 product is $2,750 after discount which makes the profit to be $59 from sales

of the 1,000 products.

Part 4 Internal Rate of Return

Cookie Business

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As the owner of the Cookie Business, you are considering the following investment: Purchase of new equipment $ 250,000.00 Expected annual increase in sales $ 48,017.50 Time frame 7 years Acceptable rate needed 9% Calculate the Internal Rate of Return: PV of annuity factor -8116.6455 Internal rate of return 5% 5.206435 Accept or reject Accept

The internal rate of return is a discount rate used to identify potential future investments

that will be profitable. It is used to make the present value of an investment to zero. This shows

the percentage return from the investment required for it to break even when adjusted for the

value of time and money involved as explained by Bora, (2015). This gives the minimum

acceptable return on investment. With a rate of 9 percent for 7 years the investment PV is a

negative which shows that it has not yet completed paying back the amount invested.

The IRR is found to be 5% taking the time frame to be 5 years. This will ensure that the

amount invested have been recovered from the profit obtained.

The transaction is biased as one of the partners is pushing for the equipment purchase

with other agenda apart from one of increasing the company production. The partner wishes to

promote his brother’s business. This is unethical as it will lead to purchase of the equipment

with unnecessary urgency which resulted from provision of false data and information. There

may be another alternative better than purchasing the equipment which might be foregone in

the process of the partner promoting his brother’s business.

Part 5 Cash Budget

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The budgeted credit sales are as follows:

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December last year $ 250,000 January $ 125,000 February $ 300,000 March $ 90,000 Collection: Month of the sale 80% Month following the sale 20% Estimated cash receipts January February March Last month's sales $ 50,000 $ 25,000 $ 60,000 Current month's sales $ 100,000 $ 240,000 $ 72,000 Total $ 150,000 $ 265,000 $ 132,000

February has the highest sale and cash flow as well as having the highest credit sales.

The higher the credit sales the higher the amount of cash flow that result in the company in the

same month. When the previous month has high credit sale, this means that the current year

sales will be boosted.

Part 6 Material and Labor Variance

Cookie Business

Actual Cost of Direct Materials $ 225,000 Standard Cost of Direct Materials $ 224,800 Actual Materials Used 30 Standard Materials Used 31 Actual Direct Labor Rate $ 15.50 Standard Labor Rate $ 15.00 Actual Hours Worked 45 Standard Hours Worked 40

Amount

Favorable/ Unfavorabl e

Calculate Materials Variances:

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Materials Price Variance $ (6,000) Unfavorable Materials Quantity Variance $ 224,800 Favorable

Calculate Labor Variances:

Labor Rate Variance $ (23) Unfavorable Labor Efficiency Variance $ (75) Unfavorable

The material price variance is the difference between the standard price and the actual

price for the actual quantity of materials used for production. Material price variance results

from price changes, poor purchasing procedures and deficiencies in price negotiation.

Material price variance= (standard price-actual price) *actual quantity

The project had a material price variance of a negative value which means it was

unfavorable as more cost was incurred than the standard cost. The material quantity variance

was a positive value which is favorable as less material was used than the standard. The labor

rate variance was unfavorable as it had a negative value. The rate for labor was higher than the

standard value. The labor efficiency variance was unfavorable as the actual hours worked were

more than the standard hours of work. When the labor and price variance is unfavorable, the

cost of production is higher than the standard and expected cost which means less profit.

Conclusions and Recommendations

The company deals with production of chocolate chip, sugar and specialty. Variance is

used to determine if the production process is operating at a cost higher than the standard cost

or lower or operating at the standard cost. When the variance is unfavorable there is less profit

earned as the cost of production is higher while when the variance is favorable, there is more

profit as less cost is incurred in production. The management team should focus in maintaining

the material price variance, quantity variance, the labor rate and efficiency favorable so as to

reduce the cost of production.

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References

Bora, B. (2015). Comparison between net present value and internal rate of return. International journal of

research in finance and marketing, 5(12), 61-71.

https://www.academia.edu/download/41051869/comparison_between_NPV_and_IRR.pdf

Gutiérrez, M. (2021). Making better decisions by applying mathematical optimization to cost accounting: An

advanced approach to multi-level contribution margin accounting. Heliyon, 7(2), e06096.

https://www.sciencedirect.com/science/article/pii/S2405844021002012

Gutierrez, P. H., & Dalsted, N. L. (1990). Break-even method of investment analysis (Doctoral dissertation,

Colorado State University. Libraries). https://www.extension.colostate.edu/docs/pubs/farmmgt/03759.pdf

Nawaz, M. (2013). An Insight Into the Two Costing Technique: Absorption Costing and Marginal

Costing. BRAND. Broad Research in Accounting, Negotiation, and Distribution, 4(1), 48-61.

https://brain.edusoft.ro/index.php/brand/article/view/382