Profit Maximization for the Playdough Company

MANAGEMENT ACCOUNTING

Answer a.
The playdough company is manufacturing a canister which involves different costs. The cost
involves both variable cost and fixed cost. Cost per unit is calculated by dividing total cost by
number of canisters (Berman, Knight and Case, 2013).
Manufacturing (cost per
unit)
Particulars
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Direct material 300000
Direct labour 180000
Variable overhead 120000
Fixed Overhead 540000
Total cost
114000
0
Number of canister 760000
Cost per canister 1.5
Answer b.
The company in the present situation produces 760000 canisters every year and the entire
production is sold. Recently, the company has got an offer from an outside to but the
canisters from outside. Let us first take the decision on the basis of financial factors which is
profitability. We will have to compare the profits of in-house manufacturing and the profits if
the canisters are bought from outside (Bragg, 2014). The reduction in the total cost will
obviously increase the profits.
From the given two tables we can easily see the difference in the profits earned by the
company:
Calculation of profit
(manufacturing)
Particulars
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Sales
167200
0
Less: Direct material 300000
Direct labour 180000
Variable overhead 120000
Fixed overhead 540000
Profit 532000
Calculation of profit

(purchase)
Particulars
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Sales
167200
0
Less: Direct material 300000
Direct labour 180000
Variable overhead 120000
Fixed overhead 432000
Profit 640000
We can observe that the fixed overhead in the case of outsourcing is reduced as there is a
reduction in the machinery depreciation by $28000 and supervisor’s salary by $80000 which
has led to increase in profits because the selling price in both the cases has been maintained at
2.2.
There is an increase of profits by (640000-532000) = 108000. Hence, it is now easy to draw a
conclusion that the management in consideration of financial factors should accept the order.
Answer c.
A company initially tries to retrieve the variable costs experienced by it and then it hopes to
reclaim the fixed costs.
It is necessary for us to compute the contribution, which can be calculated by withdrawing
the value of variable cost from the sales figure.
The value of variable cost is influenced by the amount of production on the other hand when
the fixed costs are persistent and there is no effect even if the production level is an increased
or decreased. To take this decision, we must carefully compare and analyze the contribution
of normal sales and also the contribution of special orders (Brigham and Ehrhardt, 2017).
The contribution of the company is more presentable when it is higher because this shows the
company's ability to recover the fixed cost.
Also in the process, we come to know that special order profit will be lower because the
contribution to recover the fixed cost is really very low (Gitman and Zutter, 2012). Still, the
following working will make it much easier to understand that why the company should
refuse the special orders
Calculation showing profit after neglecting the acceptance of the special order:
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