M3A 2: Required Assignment 1—Cost and Decision-Making Analysis

Must be orignal due to it be sent through Turn It in system

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Cheryl Montoya picked up the phone and called her boss, Wes Chan, Vice President of Marketing at Piedmont Fasteners Corporation.

Cheryl: “Wes, I’m not sure how to go about answering the questions that came up at the meeting with the President yesterday.”Wes: “What’s the problem?”.Cheryl: “The president wanted to know the break-even point for each of the company’s products, but I am having trouble figuring them out.”Wes: “I’m sure you can handle it, Cheryl. And, by the way, I need your analysis on my desk tomorrow morning at 8:00 sharp in time for the follow-up meeting at 9:00.”

Piedmont Fasteners Corporation makes three different clothing fasteners at its manufacturing facility in North Carolina. Data concerning these products appear below:

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,000 units

Velcro Metal Nylon
Normal annual sales volume 100,000 units 200 400,000 units
Unit selling price $1.65 $1.50 $0.85
Variable cost per unit $1.25 $0.70 $0.25

Total fixed expenses are $400,000 per year.

All three products are sold in highly competitive markets, so the company is unable to raise its prices without losing unacceptably large numbers of customers.

The company has a very effective lean production system, so there is no beginning or ending work in process or finished-goods inventories.

Using the module readings, the Argosy University online library resources, and the Internet, research break-even point and costing systems. Analyze the case based on your research and what you have learned so far in the course.

Respond to the following:

  • Calculate the company’s overall break-even point in total sales dollars. Explain your methodology (approximately 2 pages).
  • Of the total fixed costs of $400,000: $20,000 could be avoided if the Velcro product were dropped, $80,000 if the Metal product were dropped, and $60,000 if the Nylon product were dropped. The remaining fixed costs of $240,000 consist of common fixed costs such as administrative salaries and rent on the factory building that could be avoided only by going out of business entirely (approximately 2 pages):
  • Calculate the break-even point in units for each product. Explain your methodology.Determine the overall profit of the company if the company sells exactly the break-even quantity of each product. Present your results.

  • Evaluate costing systems for this company. Explain if this company should be using a job-order or process-costing system to accumulate costs (1 page).

Be sure to include your calculations in Microsoft Excel format
.

Write a 5–6-page report in Word format
. Apply APA standards to citation of sources. Use the following file naming convention: LastnameFirstInitial_M3_A2 . 

32

52

16

80

20

200

Assignment 2 Grading Criteria Maximum Points
Calculated the company’s overall break-even point in total sales dollars and explained your methodology.
Calculated the break-even point in units for each product in the scenario and explained your methodology.
Explained what the overall profit of the company will be if the company sells exactly the break-even quantity of each product and showed your results.
Compared and explained if this company should be using a job-order or process-costing system to accumulate costs.
Wrote in a clear, concise, and organized manner; demonstrated ethical scholarship in accurate representation and attribution of sources; and displayed accurate spelling, grammar, and punctuation.
Total:

 

Variable and Absorption Costing

Sprintin Case Study
Sprintin is a company that manufactures sneakers. The company’s data for the previous year is presented
below. Sprintin had no beginning inventories in January.

Sale price $156
Fixed manufacturing overhead $7,020,000
Variable manufacturing expense per unit $3,375,000
Fixed operating expense $56
Number of sneakers produced 270,000
Sales commission expense per unit $40
Number of sneakers sold 185,000

Sprintin’s variable costing income statement is as follows:
Since fixed manufacturing costs are considered to be a period cost, they are expensed in the period
incurred.

Sales (185,000 X 156) $28,860,000
Less variable costs (56 +40 = 96 X185,000) 17,760,000
Contribution margin 11,100,000
Less fixed costs (7,020,000 + 3,375,000) 10,395,000
Operating income $705,000

Sprintin’s absorption costing income statement is as follows:
As fixed manufacturing costs are considered to be product costs, they must be allocated between the units
sold and units still in inventory.
Fixed manufacturing costs = $7,020,000 / 270,000 units produced = $26 per unit.

Sales (185,000 X 156) $28,860,000
Less cost of goods sold:
Variable (185,000 X 56) + Fixed (185,000 X 26)
Gross profit

15,170,000
13,690,000

Less operating expense:
Variable (185,000 X40) + Fixed (3,375,000)
Operating income

10,775,000
$2,915,000

Inventory under the two methods would be calculated as follows:
Inventory in units (270,000 units produced less 185,000 units sold) = 85,000

Variable costing: Variable manufacturing costs (85,000 X 56) $10,360,000
Absorption costing: Variable manufacturing costs above 10,360,000
Fixed manufacturing costs (85,000 X 26) 2,210,000
Total inventory costs $12,570,000

The difference in variable costing and absorption costing income in our example is equal to the difference in
fixed cost included in inventory under the two methods.

Page 1 of 1
Managerial Accounting

©2012 Argosy University Online Programs

Once an analyst forms a cost estimate, it is important that he or she then create a financial model. The best way to do this is through cost-volume-profit analysis. The cost-volume-profit model shows the effects of any changes within an organization. Examples of changes would be sales volume, prices, and costs. The basic cost-volume-profit model is great, but it does have limitations. The largest is that it can only account for one cost driver. This model is improved upon by using activity-based costing models. When looking at any financial model, it is important to understand some basic terms. The first is the break-even point. This is when revenues equal expenses at a given sales level. Another important term is contribution margin, which is the amount of money that is left over after all variable costs are covered. Operating leverage is another important term, which is the ratio of contribution margin to operating income. A high operating leverage signals a risky company.
Making financial decisions and measuring costs are very difficult for a company, no matter the size. However, these functions are necessary if the organization is to remain successful.

This module expands on the principle of accumulating costs. It also covers using cost data to make important decisions as they pertain to investment decisions. It explores two different methods that can be used to accumulate costs: the variable costing system and the absorption costing system. You will learn to differentiate between each system as well as understand the different uses for each type of costing system presented.

Cost estimation is the process of estimating the relationship between costs and cost drivers that are responsible for the costs. There are three main reasons why companies estimate costs. These are:

· To manage costs

· To make decisions

· To plan and set standards

There is a simple way and a complex way to break down costs. The simple way is to break down costs into fixed and variable costs. The complex way is to make cost patterns, such as step costs and mixed costs.
There are three commonly used methods when it comes to cost estimation. These methods are:

· Statistical methods using regression analysis

· Account analyses

· Engineering estimates

Statistical methods using regression analysis employ cost drivers, which are independent variables and costs, which are dependent variables. When simple regression is used, there is one independent variable. When multiple regression is used, there is more than one independent variable.

With account analyses, the analyst separates costs from the accounting records into categories and their corresponding cost drivers. With the engineering estimates method, engineers create estimates based on the data derived from current practices. These estimates are found by measuring the amount of work involved to complete the activity and then assigning a cost to each activity. It is important to note that statistical methods require the least amount of data as costs are not divided into categories with cost drivers. Engineering estimates are the most expensive and time consuming as identifying activities and their costs is difficult.

Garrison, R. (2012). Managerial Accounting (14th ed). McGraw-Hill Learning Solutions.

Retrieved from

http://digitalbookshelf.argosy.edu/books/0077588002/outline/5

Link to textbook reading

http://digitalbookshelf.argosy.edu/books/0077588002/outline/5

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