Calculating Monthly Profit During Summer Months
|
Computation of Monthly Profit During Summers |
|
|
Particulars |
Amount |
|
No of Boxes |
40,000.00 |
|
Sales |
380,000.00 |
|
Less: Manufacturing Cost |
|
|
Direct Material |
160,000.00 |
|
Direct Labour |
80,000.00 |
|
Variable Overhead |
32,000.00 |
|
Fixed Overhead |
10,000.00 |
|
98,000.00 |
|
|
Less: Marketing Cost |
|
|
Variable Cost |
20,000.00 |
|
Fixed Cost |
15,000.00 |
|
Profits for the Month |
63,000.00 |
|
Statement of Profit on Acceptance of Offer |
|
|
Particulars |
Amount |
|
No of Boxes |
5,000.00 |
|
Sales |
37,500.00 |
|
Less: Variable Cost |
|
|
Direct Material |
20,000.00 |
|
Direct Labour |
10,000.00 |
|
Variable Overhead |
4,000.00 |
|
Variable Marketing Cost |
2,500.00 |
|
1,000.00 |
|
|
Less: Additional Cost |
|
|
Freight |
2,000.00 |
|
Landing Cost |
1,000.00 |
|
Benefit from the offer |
(2,000.00) |
The Company will incur losses of $2,000 due to acceptance of offer from the overseas. Hence, the offer should be rejected.
A special type of order is an order which is received once and is not repetitive in nature which is received by a company which may prove to be beneficial for the company. The main to be considered for the acceptance of an offer is the profit making capacity of the offer along with the current sales being unaffected. The other factors to be considered for the acceptance of offer are the following:
- Idle Capacity of the plant and machinery: The Company shall have enough machine capacity to perform the task. The regular production of the machinery should be first fulfilled and then the remaining capacity that is the idle capacity shall be used for the offer. The idle capacity includes not only machinery hours but also the labor hours. If the organization is already running at its full capacity, then in order to meet the order requirements the regular customers have to be foregone. This option is feasible only if there are huge profits from the acceptance of offer.
- Special Order Pricing: The order is received once and hence it is a short term decision regarding the fixation of price. The special order pricing technique is used to ensure the minimum price at which the offer should be accepted so that the company earns a profit from the project. The prices may be lower than the regular selling price but the same should generate profits to the company.
- Publicity and Advertisement: Sometimes the offer may be accepted at a lower price also, this is because the company wants to advertise about its product abroad. The company is focusing towards long term profits goals and hence it is focusing on the pricing at a lower amount and earning either low or no profits.
|
Statement of Profit on Acceptance of Offer |
|
|
Particulars |
Amount |
|
No of Boxes |
10,000.00 |
|
Sales |
80,000.00 |
|
Less: Variable Cost |
|
|
Direct Material |
40,000.00 |
|
Direct Labour |
20,000.00 |
|
Variable Overhead |
8,000.00 |
|
Variable Marketing Cost |
5,000.00 |
|
Benefit for the month |
7,000.00 |
|
Profits foregone on Acceptance of offer |
|
|
per month = |
(9.5-8)*70000 |
|
per month = |
$ 35,000.00 |
The company will have benefits of $7,000 per month from the acceptance of the Government Offer. It is advisable to accept the offer.
The company will forego a profit of $35,000 in the entire year due the low selling price on the government offer. The other variable cost and fixed cost will remain the same even if the company does not take the government offer. The loss will be incurred due to the lower amount of selling prices. Also, assuming that the total production capacity of then plant in the year is 70,000 (40,000+30,000) boxes, the company will not be able to fulfill the entire order of 120,000 (10,000 boxes per month). There will be an overall benefit of $49,000 on the part acceptance of offer by taking the entire machine capacity. Also, it is enough to cover the fixed cost of $25,000 (10,000+15,000). Hence, overall profits will be $ 24,000. Hence, the project must be accepted.
|
Statement of Profit on Acceptance of Offer |
|
|
Particulars |
Amount |
|
No of Boxes |
8,000.00 |
|
Sales |
62,400.00 |
|
Less: Variable Cost |
|
|
Direct Material |
32,000.00 |
|
Direct Labour |
16,000.00 |
|
Variable Overhead |
6,400.00 |
|
Variable Marketing Cost |
2,500.00 |
|
5,500.00 |
|
|
Less: Additional Cost |
|
|
Freight |
1,600.00 |
|
Benefit from the month |
3,900.00 |
There is a benefit of $3900 on the acceptance of the offer. Hence, the company should accept this offer. The production capacity of the machinery is assumed to be 70,000 boxes but the offer is received for 96000 boxes for the year. It is also assumed that part acceptance of offer is allowed. So the Company will aceept the offer for 70,000 boxes and will earn a total benefit of $ 34,125 during the year which is enough to cover the fixed costs of $25,000 (10,000+15,000) and earn a profit of $ 9,125. Therefore the company must accept the project.
|
Statement of Comparative Benefit |
|
|
Particulars |
Amount |
|
Rent from the letting out of property |
720,000.00 |
|
Contribution from manufacturing |
154,000.00 |
|
Comparative benefit on renting out |
566,000.00 |
The company will be benefited in renting its property to the Government as there is a comparative benefit of $566,000 from it as compared to manufacturing of items.
Hence, it is advisable to go for letting out the property instead of manufacturing of the goods.
|
Working Note: |
|
|
Computation of Profits During the year |
|
|
Particulars |
Amount |
|
No of Boxes |
70,000.00 |
|
Sales |
665,000.00 |
|
Less: Manufacturing Cost |
|
|
Direct Material |
280,000.00 |
|
Direct Labour |
140,000.00 |
|
Variable Overhead |
56,000.00 |
|
Variable Cost |
35,000.00 |
|
Contributions |
154,000.00 |
|
Less: Fixed Costs |
|
|
Fixed Overhead |
10,000.00 |
|
Fixed Marketing Cost |
15,000.00 |
|
Profits for the year |
129,000.00 |
References:
“How To Determine Whether Or Not To Accept A Special Order In Accounting”. Smallbusiness.chron.com. N.p., 2017. Web. 16 May 2017.
“11 Main Areas Of Marginal Costing | Cost Accounting”. Learn Accounting: Notes, Procedures, Problems and Solutions. N.p., 2017. Web. 16 May 2017.
“Marginal Costing Is A Powerful Technique In Pricing Decesion Of A Product Or Services”. Knowledgebible.com. N.p., 2017. Web. 16 May 2017. camie5566. “Marginal Costing”. Slideshare.net. N.p., 2017. Web. 16 May 2017.
Kumar, Vinod. “Application Of Marginal Costing In Managerial Decision Making”. Svtuition.org. N.p., 2017. Web. 16 May 2017.
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