Profit Maximization for the Playdough Company

A company is considering a special order that would require it to sell 20,000 units at $1.4 and the remaining 740,000 units at $2.2, which could impact its profit. The company's current production and sales of canisters result in a profit of $532,000 per year. However, producing coffee cups results in a small profit of $60,000. The calculations suggest that the company should not accept the special order as it would incur a terminal loss. Additionally, producing only canisters could lead to an even higher profit. Finally, considering non-financial aspects such as quality, delivery time, and reputation before making a decision is crucial.

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
Amoun
t
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
Amoun
t
Sales
167200
0
Less: Direct material 300000
Direct labour 180000
Variable overhead 120000
Fixed overhead 540000
Profit 532000
Calculation of profit

(purchase)
Particulars
Amoun
t
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:
Amoun
t

Sales
167200
0
Less: Direct material 300000
Direct labour 180000
Variable overhead 120000
Fixed overhead 540000
Profit 532000
Calculation showing profit after the acceptance of special order:
Particulars
Amoun
t
Sales
165600
0
Less: Direct material 300000
Direct labour 180000
Variable overhead 120000
Fixed overhead 540000
Profit 516000
The playdough company's maximum total capacity is 760000 units. So, if the company will
accept the special orders, then it will be selling 20000 units at 1.4 and the remaining 740000
units at 2.2. Thus, there will be a terminal impact on the company's profit, which is observed
because of the result of fall in the sales price (Hoyle, Schaefer and Doupnik, 2015).
So, according to my study, the company should not take the special order.
Answer D:
It is clearly stated in the above solution in the part c that companies should refuse to accept
any special order on the basis of its financial position. However, thinking of making profit is
not always the main agenda. Sometimes companies should take some decisions based on
other factors also. To make money in the future, we need to sacrifice the profit for a short
period of time. The acceptance of this offer may improve the relationship of the company
with its client, which may prove to be profitable both financially and for the company's
reputation. Also, there are many opponents in the market who may accept the proposal and
provide satisfaction to the customers which will result in the set back of the company and
hence it will not be able to compete with its opponent and also will no longer be able to meet
the requirements of the industry (Ehrhardt and Brigham, 2011).
Answer E:

The Playdough Company is currently having production and sales of 760000 canisters every
year which helps it to gain profits worth 532000, as shown below. The company proposes to
produce 400,000 coffee cups every year which results in a small profit of 60000 only.
Calculation of profit
(manufacturing)
Particulars
Amoun
t
Sales
167200
0
Less: Direct material 300000
Direct labour 180000
Variable overhead 120000
Fixed overhead 540000
Profit 532000
Profit on sale of coffee cups (per unit)
Sales: 1.2
Less: Direct material 0.6
Direct labour 0.2
Variable overhead 0.1
Fixed overhead 0.15
Profit on sale of coffee cups (per
unit) 0.15
Profit on 400000 cups
6000
0
Hence it is clearly stated in the calculations that the company's production of canisters should
continue. Also there is a possibility that the company may be able to increase its profits. If the
company creates only the canisters and abandons the idea of making coffee cups, it will start
earning profits amounting to 532000. The company also has a different option of producing
the coffee cups and buying the canisters from outsiders which will be helping the firm to
maximize profit (Garrison, Noreen and Brewer, 2012). The above statement can be proved by
the following calculations:
Calculation of profit
(purchase canisters)
Particulars
Amoun
t
Sales
167200
0

Less: Direct material 300000
Direct labour 180000
Variable overhead 120000
Fixed overhead 432000
Profit 640000
Profit on sale of coffee cups (per unit)
Sales: 1.2
Less: Direct material 0.6
Direct labour 0.2
Variable overhead 0.1
Fixed overhead 0.15
Profit on sale of coffee cups (per unit) 0.15
Profit on 400000 cups
6000
0
Calculation of total profit
Amoun
t
Profit from canister (purchase) 640000
Profit from coffee cups 60000
Total profit 700000
So, by the above mentioned calculation is clearly stated that the company should start buying
canisters from outside and start producing a coffee shop because it will be the best option
which will be helping it to improve its profit. As to be observed, it was incurring less profit
while producing canisters but the alternative of producing coffee mugs will help it to
maximize profit.
Answer F:
There are several reasons that are needed to be considered before drawing any conclusion.
Before taking a special order, the company should first look upon its financial position. If the
financial aspects are satisfactory then the non-financial aspects of the company are taken into
consideration (Cafferky, 2014). Nonfinancial aspects that should be taken into consideration
before finalizing the decisions are as follows:
1. Quality of the manufactured product: It can happen that the company produces a very
good quality product but when the product is purchased from outside, it may not meet

the desired quality of the product. Hence, there should be a quality check process that
should be carried out before coming to any conclusion.
2. Delivery time: The Company should discuss everything about the delivery time
because due to the failure of delivery on time the order may be reduced which will not
only cause financial loss but also non-financial loss.
3. Reputation: The Company’s reputation may be damaged if the quality of the product
is not supplied as before. Any unsatisfactory factor like delay in delivery of goods that
arises because of outsourcing may result in damage to company's reputation.

REFERENCES:
Berman, K., Knight, J. and Case, J. (2013). Financial intelligence. 1st ed. Boston, Mass.:
Harvard Business Review Press.
Bragg, S. (2014). Corporate cash management. 1st ed. Centennial: Accounting Tools.
Brigham, E. and Ehrhardt, M. (2017). Financial management. 1st ed. Boston, MA, USA:
Cengage Learning.
Cafferky, M. (2014). Breakeven analysis. 1st ed. New York: Business Expert Press
Ehrhardt, M. and Brigham, E. (2011). Financial management. 1st ed. Mason: South-Western
Cengage Learning.
Garrison, R., Noreen, E. and Brewer, P. (2012). Managerial accounting. 1st ed. New York,
N.Y.: McGraw-Hill/Irwin.
Gitman, L. and Zutter, C. (2012). Principles of managerial finance. 1st ed. England: Pearson
Education Limited.
Hoyle, J., Schaefer, T. and Doupnik, T. (2015). Advanced accounting. 1st ed. New York, NY:
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