MANAGERIAL ACCOUNTING ASSIGNMENT
Management Accounting
Excellent Engineering Limited is a medium sized, well established company, producing high quality products. The company is performing quite well in terms of market share and profitability during the last few years in the competitive environment. The management of the company has a team of professionals and all the decisions are taken on merit in consideration with the pros and cons of the situation.
You are the management accountant of the company who is responsible for performing financial analyses based on the information given below
Pricing of Product:
A board meeting is to be held next week where the team will decide on pricing of products for the forthcoming period
The following information is available from the records:
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RO
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RO
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|
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Previous Period
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Current Period
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No. of units
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100,000
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106,000
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Sales price per unit
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26
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26
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Sales revenue
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2,600,000
|
2,756,000
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|
Costs
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2,000,000
|
2,154,800
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|
Profit
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600,000
|
601,200
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You find that between the previous and current periods there was 4% general cost inflation and it is forecasted that costs will rise a further 6% in the next period. As a matter of policy, the company did not increase the selling price in the current period although competitors raised their prices by 4% to allow for the increased costs. A survey by economic consultants was conducted and it is revealed that the demand for the product is elastic with an estimated price elasticity of demand of 1.5 (i.e., the rate of change in demand is 1½ times of the price change rate). However, there will be no change in demand if Excellent Engineering Ltd., increases the price along with its competitors.
Special Machinery Order:
Excellent Engineering Ltd., has just completed an order for a piece of special machinery for Friends Engineering Ltd., and learnt that the company has defaulted on the order due to bankruptcy. The selling price of the said order is RO. 145,000 and Excellent Engineering Ltd., has right to forfeit the deposit of RO. 14,500 as per contract agreement. The product manager of the Excellent Engineering Ltd., has identified the costs already incurred in the production of the special machinery for Friends Engineering Ltd., as follows:
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RO
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Direct material
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33,200
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Direct labour
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42,800
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Manufacturing overhead applied:
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Variable
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21,400
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|
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Fixed
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10,700
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32,100
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Fixed selling and administrative costs
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|
10,810
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Total
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118,910
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Another company, Novelty Engineering Ltd., is also interested to buy the special machinery if it is reworked to Novelty's specifications. Excellent Engineering Ltd., has offered to sell the reworked machinery to Novelty as a special order for RO. 136,800. However, Novelty would pay the price After two months , when the delivery of the machine is due. The additional identifiable costs to rework the machinery to Novelty's specifications are as follows:
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RO
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Direct material
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12,400
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Direct labour
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8,400
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Total
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20,800
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A second alternative available to Excellent Engineering Ltd., is to convert the special machinery to the standard model, which sells for RO. 125,000. The additional identifiable costs for this conversion are as
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RO
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Direct material
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5,700
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Direct labour
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6,600
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Total
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12,300
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A third alternative for Excellent Engineering Ltd., is to sell the machine as it is for a price of RO. 104,000. However, the potential buyer of the unmodified machine does not want it for 60 days. This buyer has offered RO. 14,000 down payment, with the remainder due upon delivery.
The sales commission rate on sales of standard models is 2%, while the rate on special order is 3%. Normal credit terms for sales of standard models are 2/10, net/30. In general, customers pay the bills for the standard model within discount period. However, credit terms for a special order are negotiated with the customer(s). The time required for rework is one month.
The allocation rates for manufacturing overheads and fixed selling and administrative costs are as follows:
10% of the total of direct material, direct labour, and manufacturing overhead costs
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Manufacturing costs:
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Variable
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50% of direct labour cost
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Fixed
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25% of direct labour cost
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Fixed selling and administrative costs
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10% of the total of direct material, direct labour, and manufacturing overhead costs.
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Marketing a New Product: Excellent Engineering Ltd., is also considering whether to develop and market a new product Liphon. Development costs are estimated to be RO. 360,000, and there is a 0.75 probability that the development effort will be successful and a 0.25 probability that the development effort will be unsuccessful. If the development is successful, the product will be marketed, and its possible outcome would be as under:
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Possible Outcome
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Profit/ (Loss) (RO.)
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Probability
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Very successful
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1,080,000
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0.4
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Moderately successful
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200,000
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0.3
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Failure
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(800,000)
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0.3
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|
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Total
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1
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Each of the above profit and loss calculations is after taking into account the development costs of RO. 360,000.
Required:
You being the Management Consultant, have been asked by the Management to write a detailed report. Your report should include the following:
a. Introduction of the report with relevant literature review.
b. What would be the financial outcome if the company decides to maintain the selling price of RO 26 for the next period, whilst the competitors increase their prices by 6%. Would your financial outcome be different if the company also raises its price by 6%?
c. Comment with appropriate figures, recommending whether the company should maintain the selling price of RO. 26 or raise it by 6%.
d. State Your assumptions in relation to fixing the selling price for the forthcoming period.
e. Determine the net contribution each of the three alternatives, special machinery will add to Excellent Engineering Ltd's profit before tax.
f. If Novelty makes a counteroffer, what would be the lowest price for which Excellent Engineering Ltd., should accept for the reworked machinery? Justify your answer.
g. Discuss the influence of fixed manufacturing overhead cost on the sales price quoted by Excellent Engineering Ltd., for special orders.
h. Final conclusion with recommendations.