Manufacturing Plant Cost Analysis

This assignment analyzes the cost structure of three manufacturing plants (Preston, Brunswick, and Northcote) to determine their profitability. It involves calculating contribution margin, breakeven points at various production levels, operating income under different scenarios, and recommending an optimal production allocation strategy to maximize profits for a target output of 150,000 units.

MANAGEMENT ACCOUNTING

EXECUTIVE SUMMARY
Management accounting deals with the collection of various financial information of the
organisation for the purpose of decision making. Decision making is one of the most
significant parts and any error made in this process can cost heavily to the company.
Therefore, the work of the management accountant is to provide correct advise to the
company.
The work of the management accountant is to guide the company and prevent the company
from taking any kind of wrong decisions. It helps not only in decision making but also in
planning the finance of the company. There are many decisions that has to be taken by the
management in its day to day operation like whether to accept a special order, at what level of
output should it operate, whether the company will have any extra profits if it accepts it, what
is the breakeven point and many other things. A company can know the correct importance of
the management accounting when it comes to know about its various benefits. Although it
has many issues involved in it such as high cost and doubt relating to reliability but overall it
is proves to be helpful for the company.
In this report, there are various decisions taken with the help of various calculations such as
the calculations of the contribution, breakeven point, at different levels of production and also
the operating income for the year given a fixed level of production.

ANALYSIS
CONTRIBUTION PER UNIT.
Contribution per unit is determined by deducting the variable cost from the amount of
sales. Contribution can also be defined as the amount left in order to cover the fixed cost
that has been incurred. The contribution per unit for the current level of production and
maximum level of production for all the three plant of Cisco manufacturing ltd. has been
shown below along with the calculations.
1. (a) CALCULATION OF CONTRIBUTION PER UNIT (under current level of
production).
1. Northcote manufacturing plant
(170 units)
Particulars Amount
Sales 700
Less: Variable cost
Material cost 160
Labour cost 160
Overhead cost 20
Contribution per unit 360
The Northcote manufacturing plant produces 170 units at the current level of production.
2. Brunswick manufacturing plant
(190 units)
Particulars Amount
Sales 700
Less: Variable cost
Material cost 165
Labour cost 150
Overhead cost 30
Contribution per unit 355
The Brunswick manufacturing plant produces 190 units at the current level of production.
3. Preston manufacturing plant (185
units)
Particulars Amount
Sales 700
Less: Variable cost
Material cost 150
Labour cost 145
Overhead cost 35
Contribution per unit 370
The preston manufacturing plant produces 185 units at the current level of production.

1. (b) CALCULATION OF CONTRIBUTION PER UNIT (under maximum level
of production).
1. Northcote manufacturing plant (240
units)
Particulars Amount
Sales 700
Less: Variable cost
Material cost 170
Labour cost 165
Overhead cost 25
Contribution per unit 340
The maximum level of production for Northcote manufacturing plant is 240 units.
2.Brunswick manufacturing plant (310
units)
Particulars Amount
Sales 700
Less: Variable cost
Material cost 170
Labour cost 155
Overhead cost 30
Contribution per unit 345
The maximum level of production for Brunswick manufacturing plant is 310 units.
3. Preston manufacturing plant (310
units)
Particulars Amount
Sales 700
Less: Variable cost
Material cost 160
Labour cost 155
Overhead cost 30
Contribution per unit 355
The maximum level of production for Preston manufacturing plant is 310 units.

2.BREAKEVEN POINT IN TERMS OF UNITS.
Breakeven point is the point at which the company neither enjoys any profit nor has to incur
any kind of loss. It is a point at which both fixed cost and variable cost are covered fully.
Breakeven point can be calculated either in term of volume of production (units) or in term of
sales. In order to calculate Breakeven point in units the fixed cost is divided by the
contribution per unit. However, we have been asked to calculate breakeven point in terms of
units for all the three plants at current level of production as well as maximum level of
production.
Breakeven point in units= Total fixed cost
Contribution per unit
2. (a) BREAKEVEN POINT (under current level of production).
1. Northcote manufacturing plant (170 units)
Particulars Amount
Fixed cost
Manufacturing cost 1664000
Marketing cost 1248000
Total fixed cost 2912000
Particulars Amount
Total fixed cost 2912000
Contribution per unit 360
Breakeven point 8,088.89
The breakeven point for the northcote manufacturing plant at the current level of
production is 8089 units.
2. Brunswick manufacturing plant (190 units)
Particulars Amount
Fixed cost
Manufacturing cost 1872000
Marketing cost 1404000
Total fixed cost 3276000
Particulars Amount
Total fixed cost 3276000
Contribution per unit 355
Breakeven point 9,228.17
The breakeven point for Brunswick manufacturing plant is 9228 units.
3. Preston manufacturing plant (185 units)

Particulars Amount
Fixed cost
Manufacturing cost 1456000
Marketing cost 1092000
Total fixed cost 2548000
Particulars Amount
Total fixed cost 2548000
Contribution per unit 370
Breakeven point 6,886.49
The breakeven point of Preston manufacturing plant is 6887 units.
Note: As the number of units cannot be in decimals, it has been rounded off.
2. (b) BREAKEVEN POINT (under maximum level of production).
1. Northcote manufacturing plant (240
units)
Particulars Amount
Fixed cost
Manufacturing cost 2106000
Marketing cost 1638000
Total fixed cost 3744000
Particulars Amount
Total fixed cost 3744000
Contribution per unit 340
Breakeven point 11,011.76
The breakeven point has increased from 8089 units to 11012 units when the current level
is being compared to maximum level of production.
2. Brunswick manufacturing plant (310
units)
Particulars Amount
Fixed cost
Manufacturing cost 2860000
Marketing cost 2002000
Total fixed cost 4862000
Particulars Amount
Total fixed cost 4862000
Contribution per unit 345
Breakeven point 14,092.75

The breakeven point has increased from 9228 units to 14093 units when the current level
is being compared to maximum level of production.
3. Preston manufacturing plant (310
units)
Particulars Amount
Fixed cost
Manufacturing cost 1872000
Marketing cost 1456000
Total fixed cost 3328000
Particulars Amount
Total fixed cost 3328000
Contribution per unit 355
Breakeven point 9,374.65
The breakeven point has increased from 6887 units to 9375 units when the current level is
being compared to maximum level of production.
3. Operating income if 50000 units production per year.
Production per
day= Production during the year
Number of days
.= 50000
260
.= 192.3077
1. Northcote manufacturing plant (50000units)
Particulars Amount
Sales 35000000
Less: Variable cost
Material cost 8500000
Labour cost 8250000
Overhead cost 1250000
Less: Fixed cost
Marketing cost 2106000
Manufacturing cost 1638000
Operating income 13256000.00
If the Northcote manufacturing plant produces 192 units in average per day then it is
operating at a maximum level of its production and so for calculating the operating
income, the variable cost and fixed cost information has been taken of the maximum
level.

2. Brunswick manufacturing plant (50000 units)
Particulars Amount
Sales 35000000
Less: Variable cost
Material cost 8250000
Labour cost 7500000
Overhead cost 1500000
Less: Fixed cost
Marketing cost 1872000
Manufacturing cost 1404000
Operating income 14474000.00
The normal level of production of the Brunswick manufacturing plant ranges between
180-219 units per day as 192 units lie between this range, the information of fixed cost
and normal cost has been taken from there.
3.Preston manufacturing plant (50000units)
Particulars Amount
Sales 35000000
Less: Variable cost
Material cost 7500000
Labour cost 7250000
Overgead cost 1750000
Less:Fixed cost
Marketing cost 1456000
Manufacturing cost 1092000
Operating income 15952000
Like the manufacturing plant at Brunswick the Preston manufacturing plant also will take
into consideration the variable cost and fixed cost at a normal level of production.

4. PRODUCTION AND ALLOCATION OF 150000 UNITS.
The following table shows the ranking because of which the final decision is taken. The
options with least cost has been preferred in order to earn higher profits.
Particulars
Northcote
Manufacturing Plant
Brunswick
Manufacturing Plant
Preston
Manufacturing Plant
Between 60 – 159
units per day
Between 60 – 179
units per day
Between 60 – 179
units per day
Variable Materials cost
pu
$160 $160 $160
Variable Labour costs
p.u
160 160 160
Variable Overhead
costs pu
20 20 20
Fixed Manufacturing
(annual) costs
2,34,000 3,12,000 1,56,000
Fixed Marketing
(annual) costs
1,56,000 2,34,000 1,56,000
Per year 14055600 15823600 15823600
Total 144,45,600 163,69,600 161,35,600
Per unit 349.4339623 351.7318436 346.7039106
Ranking 2 3 1
Maximum units to be produced in Preston Manufacturing Plant at minimum capacity= 179*260 = 46540
units
Maximum units to be produced in Northcote Manufacturing Plant at minimum capacity= 159*260 = 41340
units
Maximum units to be produced in Brunswick Manufacturing Plant at minimum capacity= 179*260 =
46540 units
The remaining number of units i.e. 150000-46540-41340-46540=15580 shall be produced by
the prestone manufacturing plant based on the following table.
Particulars
Northcote
Manufacturing Plant
Brunswick
Manufacturing Plant
Preston
Manufacturing Plant
Between 160 – 179
units per day
Between 180 – 219
units per day
Between 180 – 219
units per day
Variable Materials
costspu
$160 $165 $150
Variable Labour costs
p.u
160 150 145
Variable Overhead
costs p.u
20 30 35
Fixed Manufacturing
(annual) costs
16,64,000 18,72,000 14,56,000
Fixed Marketing
(annual) costs
12,48,000 14,04,000 10,92,000

Per year 15823600 19644300 18790200
total 187,35,600 229,20,300 213,38,200
Per unit 402.5698324 402.5342466 374.7488584
Ranking 3 2 1
CALCULATION SHOWING TOTAL COST ON PRODUCING 150000 UNITS AT
DIFFERENT PLANTS
Northcote
Manufacturing
Plant
Brunswick
Manufacturing
Plant
Preston
Manufacturin
g Plant
Preston
Manufacturin
g Plant
Tota
l
No of Units 41340 46540 46540 15580
150
0 00
Variable
Materials costs
perunit
160 160 160 150
Variable Labour
costs perunit
160 160 160 145
Variable
Overhead costs
perunit
20 20 20 35
Fixed
Manufacturing
(annual) costs
2,34,000 3,12,000 1,56,000 14,56,000
Fixed Marketing
(annual) costs
1,56,000 2,34,000 1,56,000 10,92,000
Total Cost
14445600 16369600 16135600 7689400
546
402
00
As per the question, all the 150000 units that were produced were sold by the company. So,
the profits earned is as follows:
Total Revenue to be generated (150000*700) 105000000
Total cost for manufacturing of these units 54640200
Profit 50359800

FINDINGS and RECOMMENDATION.
The company always starts up a business to earn profits. It can earn profits only when it
recovers all the fixed cost and variable cost that has been incurred. Contribution helps us to
know that whether the company will be able to cover its fixed cost also after recovering the
variable cost.
From the above calculations, we can observe that at the normal level of production the
contribution per unit of Preston manufacturing level is the highest which means that this plant
will be able to recover the fixed cost at a greater extent when compared to the rest of the two
plants (Arora, 2012). Not only at the normal level of production but also at the maximum
level of production has the same been seen.
We can conclude from this that higher the contribution per unit better it is but this is not the
same in case of the breakeven point. When a company calculates breakeven point of a
product it always wants it to be low. The lower the breakeven point the better it is because the
company can earn profits only after the breakeven point has been achieved.
In the solution breakeven point has been calculated for all the three plants for the current
level of production as well as for the maximum level of production. According to the current
level and maximum of production, the breakeven point of the plant at Preston is the minimum
whereas the one for Brunswick it’s maximum. This means that the plant at Preston is able to
recover its cost faster and then also start earning profits.
In the third part of the question, the operating income of each plant has to be determined
provided 50000 units have to be produced in the whole year and the entire is also sold. As we
know that the variable cost and fixed cost vary based on the volume of production and the
capacity we need to check for each plant that what the level of output i.e is. Minimum
capacity, Normal Capacity or Maximum capacity. Therefore, average production per day is
calculated and then the operating income has been calculated. The operating income for
prestone manufacturing plant is maximum whereas for northcote it is the least (Khan & Jain,
2013).
The fourth question is totally relating to decision making. The company needs to produce
150000 units in the whole year. It has to allocate in such a way that the cost is minimum so
that the plant can earn maximum profits. By the calculations shown above the following can
be concluded:
Prestone manufacturing plant should produce a total of 62120 units.
Northcote manufacturing plant should produce a total of 41340 units.
Brunswick manufacturing plant should produce a total of 46540 units.
This will help the company to generate a revenue of (150000*700)= 105000000 and incur a
total cost of 54640200 and it will help to earn profit 50359800.

REFERENCE:
Arora, M. (2012). A textbook of cost and management accounting. New Delhi: Vikas
Publishing House PVT LTD.
Khan, M., & Jain, P. (2013). Management accounting. New Delhi, India: McGraw-Hill
Education (India).