Management Accounting: Financial Analysis and Profit Maximization

This article discusses financial analysis and profit maximization in management accounting, with a focus on a case study of ABC Limited and Sam. It covers topics such as contribution margin, incremental costs and benefits, and machine hour constraints. The article also includes references to relevant textbooks on the subject.

MANAGEMENT ACCOUNTING
STUDENT ID:
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Question 1- ABC LIMITED
(a) An appropriate financial analysis would require computation of the contribution margin
for each of the two products which has been carried out below.
Particulars Standard Deluxe
Selling price per unit 70 120
(-) Direct material per unit 15 22
(-) Direct labour per unit 10 30
(-) Variable manufacturing overhead per unit 10 20
Contribution margin 35 48
The variable manufacturing overhead per unit has been computed by subtracting the fixed
manufacturing overhead per unit at $ 20 per machine hour. Since for each standard unit, one
machine hour is required, hence variable overhead cost = 30-20 = $ 10. On the other hand,
for each deluxe unit, two machine hours are required, hence variable overhead cost = 60-
(20*2) = $ 20
Based on the above financial analysis, it is apparent that unit contribution margin for
Standard and Deluxe model are $ 35 and $ 48 respectively and hence the Deluxe model is
able to generate a higher profit in comparison to Standard model (Drury, 2016).
(b) It is apparent that in the month of June, the total machine hours available are 60,000.
Given that the constraint is machine hours, hence the model which generates higher profit per
unit machine hour would be preferred (Damodaran, 2015).
Contribution margin of Standard Model = $ 35
Number of machine hours required for each unit of Standard Model = 1 hour
Hence, contribution margin per machine hour for standard model = 35/1 = $ 35
Contribution margin of Deluxe Model = $ 48
Number of machine hours required for each unit of Deluxe Model = 2 hour
Hence, contribution margin per machine hour for Deluxe model = 48/2 = $ 24
From the above computation, it is apparent that the standard model ought to be preferred.

Total demand of Standard Model = 40,000 units
Number of machine hours consumed to fulfil the same = 40000*1 =- 40000 hours
Machine hours left = 60000-40000 – 20,000 hours
Number of units of Deluxe Model that can be produced in June = 20000/2 = 10,000 units
Based on the above, to maximise the profits, 40,000 units of Standard Model and 10,000
units of Deluxe Model ought to be produced in June.
Question 2: Sam
a) The current analysis which has been carried by Sam is incorrect owing to the fact that a
host of costs which have been included are not incremental cost and these were incurred even
before the new fresh fruit juice corner was created. The financial analysis should be based
only on the incremental costs and benefits that are derived which is not the case with Sam’s
analysis (Brealey, Myers & Allen, 2014).
b) For the correct profit and loss analysis, it is imperative to consider only the incremental
costs and benefits which has been done as shown below.
The items ignored include depreciation of building since it would remain the same and hence
no incremental charge should be made to the juice counter. Since incremental utilities would
be consumed hence, utilities are taken in the profit analysis indicated above. Also, the
manager’s salary which had been allocated is not considered as it is not an incremental cost
and was incurred previously also to the same extent (Bhimani, Horngren, Datar & Foster,2017).

References
Bhimani, A., Horngren, C.T., Datar, S.M. & Foster, G. (2017), Management and Cost Accounting 4th
ed. Harlow: Prentice Hall/Financial Times
Brealey, R. A., Myers, S. C. & Allen, F. (2014) Principles of corporate finance, 6th ed. New
York: McGraw-Hill Publications
Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York:
Wiley, John & Sons.
Drury, C. (2016) Cost and Management Accounting: An Introduction. 6th ed. New York: Cengage
Learning