Analysis and Recommendation on Split off of Bonalide and Outsourcing Decision of Vacuum Cleaners from India

This document provides an analysis and recommendation on the split off of Bonalide in the chemical production process for swimming pool and the outsourcing decision of vacuum cleaners from India. It includes a review of the current process and costs, as well as recommendations for the split off and outsourcing decisions. The document also highlights key considerations for outsourcing and provides a recommendation based on the analysis.

Answer to Question 1:
1. The revenue budget for Resort Island University for the upcoming academic year is
presented as under:
Revenue Budget
Details Amount
Current No. of Students 15,000
Add: Forecasted Growth (5%) 5%
Projected No. of Students for upcoming year 15,750
Less: Students awarded scholarships 150
Revenue generating students 15,600
No. of subjects undertaken (4 subjects for 2 semesters each) 8
Total subjects studied (No. of students * Subjects/student) 1,24,800
Fees Per subject $3,500
Total projected revenue (No. of subjects * Fees/subject) $43,68,00,000
The total projected revenue for the university is $436,800,000.
2. The number of staff needed to cover classes for the upcoming academic year is
presented as under:
Number of Staff Needs
Particulars Numbe
r
Total no. of students (a) 15,600
Students per class (b) 80
Total No. of classes (a*b) 195
No. of subjects undertaken (4 subjects for 2 semesters each) 8
Total subjects each class (Classes * subject) 1,560
Subjects covered by each academic staff 3
Thus, total staff to cover all classes (Total subjects/Subjects/staff) 520
The total number of staff needed to cover classes is 520.
3. Five probable actions which the university might take to accommodate the growing
no. of students while facing shortage of academic staff can be:
a. The university can consider employing part-time instructors to reduce cost.
b. They can employ teaching assistants in form of graduate staff, online
instructors etc.
c. The no. of subjects per academic staff can be revised to accommodate more
subjects.

d. The number of students per class can be revised or the number of subjects
offered currently can be reduced.
e. The university can consider shifting courses to summer term, winter term etc.
4. Unfortunately the DVC of the university do not understand the linkages in the
budgeting processes. He should be informed that the key drivers for both revenue and
cost of the university are the number of students getting enrolled and not the number
of staff. All the requirements of the university starting from academic staff itself,
cafeteria, maintenance, library etc. are based on the number of students enrolled and
thus they are the key drivers for the university.

Answer to Question 2:
1. The total standard clerical hours allowed in the month of April is as below:
Computation of Standard Clerical Hours
Policies Standard
Hours/application
No. of
application
Total Standard
Hours
(A) (B) (A*B)
Health 1 375 375
Life 1.5 300 450
Automobile 2 150 300
Renter 2 600 1,200
Homeowner 5 300 1,500
Total Standard Hours 3,825
The total standard clerical hour allowed in the month of April is 3,825 hours.
2. A flexible budget is a budget that varies with the level of input or output for the firm
making it more realistic with the activity levels. Here, for Good Health Insurance
Company, the level of hours required for each of the 5 policies varies significantly;
indicating the efforts required for processing of each of the policies is different. A
flexible budget based on application will provide misleading result as it would assume
the number of hours required for each application to be same which is not the case
actually. Thus, the flexible budget should be based on hours applied in each of the
policy application.
3. The formula flexible overhead budget for the company is constructed as below:
Fixed overhead costs $6,000
Variable Overhead Rate / Application $10
Let H represent the clerical time in hours H
Total Budgeted monthly Overhead Cost = $10*H + $6,000
Based on this, the flexible budget for total overhead cost in April is as below:
Total Budgeted Clerical Hours 3,825
Thus, total Budgeted Overhead = $10*H + $6,000
Total Budgeted Overhead = $10*3,825 + $6,000
Total Budgeted Overhead $44,250

4. Memorandum to the management
To,
The Management
Good Health Insurance Company
Dear Sir,
In a view to strengthen the system of monitoring cost, it is recommended to implement and
use the system of standard costing that enables us compare the actual cost with the standard
cost of each activity, thus highlights the variances in cost that would enable us to monitor and
control the cost better.
The advantages of using standard costing are listed as below:
 Better monitoring of the costs by identifying the variances.
 Better control of the cost by taking remedial measures for cost having adverse
variances.
 Enables better decision-making by the company.
Standard costing envisages setting up standard costs for the product and then tracking the
actual against them to monitor the effectiveness and efficiency.
Regards.

Answer to Question 3:
1. The total overhead to be allocated to the order of development of chemicals is:
Total Overhead to be Applied to Chemical Development
Activity Usage Cost/unit of driver Total Overhead
(Usage * Rate/unit)
Machine Set ups 4 $3,000 per set up $12,000
Material handling 10,000 $3 per Kg $30,000
Hazardous Waste control 2,000 $8 per kg $15,000
Quality Control 10 $112.50 per inspection $1,125
Other Overhead Cost 500 $15 per Mc hrs $7,500
Total Overhead $65,625
The total overhead to be allocated to the order of development of chemicals is $65,625.
2. The total order of the chemicals is for 1,000 boxes. The overhead cost per box can be
computed as below:
Overhead Cost per box
Total overhead for 1,000 boxes $65,625
No. of Boxes 1000
Overhead Cost/Box $65.63
The overhead cost per box is $65.63.
3. The predetermined overhead rate for the company if it wishes to use a plant-wide rate
based on machine hours can be computed as below:
Departmental Overhead Rate
Particulars Amount
Total Overhead Costs $9,37,500
Machine Hours 20,000
Predetermined Departmental
Overhead Rate $46.88
The predetermined overhead rate per machine hour is $46.88.
4. Based on the predetermined overhead computed above, the total and per unit cost of
the order for chemicals development is as below:

Overhead Allocation to order
Particulars Amount
Machine Hours Required $500
Predetermined Departmental Overhead Rate $46.88
Total Overhead to be Allocated $23,437.50
No. of Boxes 1,000
Overhead Cost/Box $23.44
The total overhead to be allocated to the order of development of chemicals under pre-
determined overhead rate is $23,437 with per unit cost of the box as $23.44.
5. Both these systems of product costing allocate the overhead costs of the company
differently and hence the difference. The ABC costing allocates cost on the basis of
usage of the activity by the job or service whereas the traditional costing uses one
single method (in this case machine hours) to allocate all the overhead costs. This
leads to under application and inappropriate allocation leading to huge difference.
The recommendation will be to use the ABC costing method as that it is more
accurate and logical in allocating the cost of the overhead to the service.
6. To calculate the unit cost of the special order, we will first compute the per unit
overhead as below:
Total Overhead to be Applied to 100 specially coated plates
Activity Usage Cost/unit of driver Total Overhead
(Usage * Rate/unit)
Machine Set ups 2 $3,000 per set up $6,000
Material handling 800 $3 per Kg $2,400
Hazardous Waste control 300 $8 per kg $2,250
Quality Control 3 $112.50 per inspection $338
Other Overhead Cost 50 $15 per Mc hrs $750
Total Overhead $11,738
Overhead Cost per plate
Total overhead $11,738
No. of Plates 100
Overhead Cost/Box $117.38
The unit cost of production order for 100 specially coated plates is as below:

Unit cost of Production
Particulars Amount
Direct Material Cost $180
Direct Labour $60
Overhead Cost $117
Total per unit cost $357

Answer to Question 4:
From
To, The Managing Director, Cool Pool’s Ltd
Subject: Analysis and recommendation on Spilt off of Bonalide and outsourcing decision of
Vaccum Cleaners from India
Date: 8th May, 2019
Respected sir,
This is in reference to our discussion on analysing the split off or further processing of
Bonalide in the chemical production process for swimming pool and your consideration of
outsourcing the vacuum cleaners’ production to a supplier in India. We have reviewed your
requirement of scenarios considering processing further bonalide to produce Kitrocide and if
bonalide is sold at the split off point. Please see our analysis and recommendation as below
for your reference and final decision:
1. Current Flow of Process and cost at the production facility is as below:
10,000 litres of GSX is processed into 7,000 litres of xenite and 3,000 litres of
bonalide, wherein only Bonalide can be processed further to form ketrocide. Thus cost
of xenite become irrelevant.
Currently, Bonalide has an allocated cost of $12,000 and can be sold at $5,000. Thus
the loss at the spilt off point sales is $7,000 ($12,000 - $5000). With further
processing the kitrocide can be sold at $20,000 with an additional cost of $26,200.
Thus, the incremental revenue for the product will be a loss of $6,200 ($20,000 -
$26,200).
2. We would also like to bring to your notice the critical points which you must consider
while taking your decisions on outsourcing the vacuum cleaners production.
Outsourcing is a strategic decision for any company and brings in additional
responsibility to the management to review the proposal with adequate due diligence.

Recommendation:
1. Basis this, it is prudent not to process bonalide further as that would only maximize
the loss for the company and not add any revenue. It is recommended to continue
selling the product at the spilt off point only without processing it further.
2. The key issues for you to consider while evaluating the proposal are listed as below:
a. Cost efficiency of the offer. You should thoroughly consider the cost saving and
profit maximizing capabilities of the offer made by the Indian company.
Outsourcing is beneficial only when it brings more profit to the company.
b. Reputation and credibility of the outsourcing partner is another critical area.
c. The communication feasibility to address issues quickly and effectively.
d. The risks in the deal in terms of cultural risk, social risk, financial risk etc., all
should be considered.
While, outsourcing relieves the company from production pressure, it being in additional
pressure in terms of having effective control and information of the partner and thus decision
on outsourcing should not be made under any pressure.
Regards.

Answer to Question 5:
1. The Income Statement for SlumberWorld under Absorption Costing is as below:
Slumberworld
Absorption Costing Income Statement
Particulars Amount Amount
Sales (13,500 * $60) $8,10,000
Less: Cost of Goods Sold
Beginning Inventory $0
Add: Cost of Goods Manufactured (15,000 *$19.40)
$2,91,00
0
Less: Closing Inventory (15,000-13,500 * $19.40) $29,100 $2,61,900
Gross Margin $5,48,100
Selling & Administrative Costs
Variable $13,500
Fixed $90,000 $1,03,500
Net Operating Income $4,44,600
(Please refer the attached excel for explanation)
The Income Statement for SlumberWorld under Variable Costing is as below:
Slumberworld
Variable Costing Income Statement
Particulars Amount Amount
Sales (13,500 * $60) $8,10,000
Less: Variable Costs
Variable cost of Goods Sold (Mat+Lab+Ohd) $1,94,400
Variable Selling & Administrative Overhead $13,500 $2,07,900
Contribution Margin $6,02,100
Less: Fixed Costs
Fixed Overhead $75,000
Fixed Selling & Administrative Overhead $90,000 $1,65,000
Net Operating Income $4,37,100
(Please refer the attached excel for explanation)
2. The absorption costing method shows a higher operating income as under this method
the fixed manufacturing overhead as a part of the total product cost and thus included
as part of ending inventory which is not the case with variable costing. Variable
costing do not allocate fixed costs to the ending inventory and hence the difference in
operating income.

3. The finished goods inventory under both the costing systems is as below:
Finished Goods Inventory
Particulars Amount
Under Absorption Costing $29,100
Under Variable Costing (1500* $14.40) $21,600
(Please refer the attached excel for explanation)
4. I would recommend using absorption costing method as that is more relevant, logical
and accurate in tracking the profits of the company. It includes the cost of the fixed
manufacturing overhead in the products for the period in which it is incurred opposed
to the concept used in variable costing which defers the cost till the product is sold.
This leads to accurate level of income while using absorption costing.

References
AccountingCoach.com. (2019). Activity Based Costing | Explanation | AccountingCoach.
Retrieved from https://www.accountingcoach.com/activity-based-costing/explanation on
14 Apr. 2019
Bragg, S. (2019). Process costing | Process cost accounting. AccountingTools. Retrieved
from https://www.accountingtools.com/articles/2017/5/14/process-costing-process-cost-
accounting on 14 Apr. 2019