Answer a.The following table shows the calculation of cost per canister: ManufacturingParticularsAmountDirect material300000Direct labour180000Variable overhead120000Fixed Overhead540000Total cost1140000Number of canister760000Cost per canister1.5Answer b.The company has to take make or buy decision which cannot be taken without taking intoconsideration various financial and non financial aspect. So, we need to check the financialgrounds by doing some calculations (Berman, Knight and Case, 2013).Calculation of profit ParticularsManufacturingPurchaseSales16720001672000Less: Direct material300000300000Direct labour 180000180000Variable overhead120000120000Fixed overhead540000432000Profit532000640000If the company takes the decision to buy canisters from outside then the company is able toearn higher profits as there is a cost reduction when we buy the canisters from outside. Thecost that is reduced includes supervisor’s salary of 80000 and machine depreciation of 28000.Therefore, on the financial grounds the company should stop manufacturing and start buyingthe canisters (Bragg, 2014).Calculation of fixed overheadFixed overhead540000Less: Supervisors salary80000Machinery depreciation28000Fixed overhead in purchase432000
Answer c.The acceptance or repentance of a special order can be taken by determining the contributionin both the cases. Contribution is calculated by deducting variable cost from the sales. It canalso be said that contribution is the amount that helps the company to recover its fixedoverheads (Brigham and Ehrhardt, 2017).Contribution perunitNormalSpecial orderSelling price per unit2.21.4Less: Direct material 0.390.39Direct labour 0.240.24Variable overhead 0.160.16Contribution perunit 1.410.61As the company has a lower contribution if it accepts the order it should rather reject thisspecial order because higher the contribution, the more it will have the ability to recover fixedcost and that would result in higher profits. The impact on the profits of the company isshown below (Gitman and Zutter, 2012).(i)Table showing profit when the special order was rejectedParticularsAmountSales1672000Less: Direct material300000Direct labour 180000Variable overhead120000Fixed overhead540000Profit532000(ii)Table showing profit on acceptance of special orderParticularsAmountSales1656000Less: Direct material300000Direct labour 180000Variable overhead120000Fixed overhead540000Profit516000
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Management Accounting | Questions and Answerslg...