Accounting Assignment 1: Financial Analysis of Profitability and Cost

This accounting assignment analyzes the profitability of Pacific Telemet Ltd. and Go-Go-Grow Ltd. by examining different business scenarios and cost structures. The first part of the assignment evaluates various proposals to increase the profitability of a smartphone manufacturing company, considering factors like selling price, variable and fixed costs, and break-even points. The analysis includes the impact of quality improvements, advertising campaigns, and promotional rebates on profit margins and sales. The second part focuses on a special order for Go-Go-Grow Ltd., determining the appropriate bidding price based on factory capacity and opportunity costs, considering direct materials, labor, and overhead costs. The assignment highlights the importance of understanding cost behavior, break-even analysis, and the impact of different strategies on overall profitability and financial decision-making, providing a comprehensive overview of financial analysis and cost management.

ACCOUNTING
ASSIGNMENT

1
By student name
Professor
University
Date: 25 April 2018.
1 | P a g e

2
Contents
Question 1...................................................................................................................................................3
Question 2...................................................................................................................................................4
References...................................................................................................................................................6
2 | P a g e

3
Question 1
From: Executive, Pacific Telemet Ltd.
To: Sherri Walkins, CEO, Pacific Telemet Ltd.
Date: 18th January, 2019
It has been observed that the company is under pressure to increase the profitability with respect to
manufacturing of the high end smart phone with dual sim cards that is popular with the business
executives. Based on the business as usual, the company made a profit of $ 1920000 last year as per the
below simulation (Arnott, et al., 2017). However, for the current year, various proposals have been kept
forward to increase the profitability. The same has been discussed below:
Particulars Original Idea A Idea B Idea C
No of units sold
12,00
0
15,60
0
10,56
0
2,50
0
11,50
0
Selling price per unit
46
0
46
0
52
0
42
0
46
0
Less: Variable Costs
Variable manufacturing costs
18
4
18
4
18
4
18
4
18
4
Variable selling and administrative
costs
3
6
7
2
3
6
3
6
3
6
Total variable cost per unit
22
0
25
6
22
0
22
0
22
0
Contribution per unit
24
0
20
4
30
0
20
0
24
0
Total Contribution
2,880,00
0
3,182,40
0
3,168,00
0
500,00
0
2,760,00
0
Less: Fixed Costs
Fixed manufacturing costs
360,00
0
360,00
0
360,00
0
360,00
0
Fixed selling and administrative costs
600,00
0
660,00
0
720,00
0
650,00
0
Total Fixed Costs
960,00
0
1,020,00
0
1,080,00
0
1,010,00
0
Net Profit/Margin
1,920,00
0
2,162,40
0
2,088,00
0
2,250,00
0
Break even sales (in units)
8,00
0
10,60
0
6,96
0
9,66
3
Safety Stock (in units)
4,00
0
5,00
0
3,60
0
4,33
7
3 | P a g e

4
As per the idea given by production manager, David Groate, in case the quality improvement is made for
the product by increasing variable costs of $36 per unit and additional $60000 in national advertising
campaign and if it induces the sales increase by 30%, then the overall profit would rise to $ 2162400.
However, due to the additional cost burden, the break-even units would also increase to 10600 from
8000 units (Heminway, 2017). The safety stock in this case would be 5000 units as compared to 4000
units originally. Furthermore, in case the idea given by the sales manager, Kirsten Arnold is materialised
such that the advertising expenses are increased by $120000 and the per unit selling price is increased
by $ 60 with 12% decrease in sales at unit levels, the overall profitability would increase to $ 2088000
from $ 1920000. In this case, the break-even units would fall down to 6960 units and the safety stock
would be 3600 units. This would be on account of increase in the selling prices per unit. Finally, in case
the promotion campaign of giving a rebate of $ 40 per unit for the first 2500 units of phones is provided
to customers as per the suggestions given by Jess Sutherland, the marketing director, the profit would
increase to $ 2250000 where the breakeven units would be 9663 units and the safety units would be
4337 units (Alexander, 2016).
Question 2
1. The amount that should be charged by Go-Go-Grow Ltd. for the contract in case the annual
factory capacity is 90000 units and 75000 units respectively has been shown below:
a. When the annual factory capacity is 90000 units, the company would not have to sacrifice
any profit from its normal course of business and since there would be no additional costs
incurred for variable selling and administrative costs as well as the fixed costs, therefore the
minimum bid made should be able to cover all the variable expenses incurred (Linden &
Freeman, 2017).
Particulars Amount
No. of units to be produced 20,000
Direct material cost 150
Direct labour cost 75
Variable Factory Overhead 35
Total Manufacturing cost 260
Total amount to be charged 5,200,000
b. When the capacity is 75000 units, therefore in order to complete the order of 20000 units, it
would have to sacrifice the 5000 units in the normal course of business. In such a case,
amount to be bid is shown below:
Particulars Amount
Opportunity cost loss on 5000 units 2,125,000
(720-150-75-35-35)*5000
Incremental variable cost on 15000 units 3,900,000
4 | P a g e

5
(150+75+35)*15000
Total amount to be charged 6,025,000
2.
From: Accountant, Go-Go-Grow Ltd.
To: CEO, Go-Go-Grow Ltd.
Date: 18th January, 2019
Go-Go-Grow Ltd. is a children electric toy car manufacturer which is based out of Geelong and has the
customer base in Australia and USA. The current estimated sales volume per unit wise, monthly and
annually has been shown below in the table. One of the overseas company, Mantel Ltd. having its
customer base in China and India has approached for a special order of 20000 units of toy cars as its
existing supplier has suffered a substantial earthquake damage.
Particulars Per unit Monthly Annually 90,000
No. of units produced 1 5,000 60,000 90,000
Direct material cost 150 750,000 9,000,000 150
Direct labour cost 75 375,000 4,500,000 75
Variable Factory Overhead 35 175,000 2,100,000 35
Fixed Factory Overhead 40 200,000 2,400,000
Total Manufacturing cost 300 1,500,000 18,000,000
Selling & Administrative Costs
Variable Selling & Administrative Costs 35 175,000 2,100,000
Fixed Selling & Administrative Costs 25 125,000 1,500,000
Total cost 360 1,800,000 21,600,000
Selling price 720 3,600,000 43,200,000
Profit 360 1,800,000 21,600,000 -
Price to be bid per unit 260
It is already known that there will be no variable selling and administration costs as well as no additional
fixed costs since this is a special order for which no selling efforts would be required. Furthermore, fixed
factory overhead would also not be incurred being fixed in nature (Choy, 2018). The company normal
produces 60000 units based on budgeted sales level and the annual capacity being 90000 units, there
would be no sacrifice of the original estimated units. Therefore, in order to maintain the same level of
profitability of $21,600,000, it should be bidding at least the variable costs per unit which comes out to $
260 per unit. For 20000 units, the total bidding should be at least $5,200,000. The possible opportunity
with the order is that this will give the minimum profitability of $ 21.6 MN or more and the disadvantage
with accepting this order is the company will be losing out on the other opportunity in hand (if available
from some other customer) and thereby the corresponding profit as well (Goldmann, 2016).
5 | P a g e

6
Furthermore, in case in the quality of the delivery is not maintained and the CEO of Mantel Ltd. is not
satisfied, then Go-Go-Grow Ltd. may not receive from orders from the customer.
References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp.
411-431.
Arnott, D., Lizama, F. & Song, Y., 2017. Patterns of business intelligence systems use in organizations.
Decision Support Systems, Volume 97, pp. 58-68.
Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis.
Ecological Economics, p. 145.
Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business.
Financial Environment and Business Development, 4(3), pp. 103-112.
Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and
Organic Documents. SSRN, pp. 1-35.
Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making. Business
Ethics Quarterly, 27(3), pp. 353-379.
6 | P a g e