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 material300000 Direct labour180000 Variable overhead120000 Fixed Overhead540000 Total cost 114000 0 Number of canister760000 Cost per canister1.5 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: Calculationofprofit (manufacturing) Particulars Amoun t Sales 167200 0 Less: Direct material300000 Direct labour180000 Variable overhead120000 Fixed overhead540000 Profit532000 Calculationofprofit
(purchase) Particulars Amoun t Sales 167200 0 Less: Direct material300000 Direct labour180000 Variable overhead120000 Fixed overhead432000 Profit640000 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
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