ACCT6004 Management Accounting Case Study: Costing & Profitability

This document presents a comprehensive solution to a management accounting case study. It includes cost classifications (variable, fixed, mixed, and step costs), profit analysis using the operating profit equation, break-even point calculations, margin of safety analysis, and an evaluation of different strategic options involving pricing and advertising campaigns. The analysis extends to income statement preparation, cost of goods manufactured, and gross profit calculations under various scenarios. Recommendations are provided based on the financial analysis, focusing on maximizing profitability and optimizing cost management strategies. The document also highlights the importance of cost behavior and contribution margin analysis in making informed business decisions. This resource is ideal for students studying management accounting and seeking practical application of key concepts.

Running Head: Management Accounting
Management Accounting

Management Accounting 1
ACTIVITY 1
Part 1
Classification of costs
Variable Cost Fixed Mixed Step
C b a e
d F
Part 2
Part a
Operating Profit Equation=
(Sales * P/V Ratio) - Fixed Expenses
1039500 * 20% - 168000
$ 39,900.00
Part b
Total Number of units sold=
Total Sales/ Selling Price per unit
1039500/20
51975 units
Actual Number of Jerseys sold this year 51975

Management Accounting 2
Units sold = 90% of Planned Sales Units
Total units planned 51975/90%
Planned units 57750 units
Actual Planned
Number of Jerseys
sold 51975 57750
Sales
$
1,039,500.00 $ 1,155,000.00
Less : Variable costs
Cost of goods sold
$
769,230.00 $ 854,700.00
Sales Commission
$
62,370.00 $ 69,300.00
Total Variable
Expenses
$
831,600.00 $ 924,000.00
Contribution per unit
$
207,900.00 $ 231,000.00
Less: Fixed Cost
Selling Expenses
$
116,500.00 $ 116,500.00
Administrative
Expenses
$
51,500.00 $ 51,500.00
Total Fixed Costs
$
168,000.00 $ 168,000.00

Management Accounting 3
Operating Income
$
39,900.00 $ 63,000.00
Less Tax @ 30%
$
11,970.00 $ 18,900.00
Profit After Tax
$
27,930.00 $ 44,100.00
The extra profit that could be earned if planned units are actually sold $ 16,170 (44100-
27930)
Part c
Variable costs
Cost of goods sold (55000*14.80) $ 814,000.00
Sales Commission (55000*1.20) $ 66,000.00
Total Variable Cost $ 1,628,000.00
Fixed Cost
Selling Expenses $ 116,500.00
Administrative Expenses $ 51,500.00
Total Fixed Costs $ 168,000.00
Total Cost of 55000 units to be reported in
income statement $ 1,796,000.00
Part d
Change in the operating profit equation:

Management Accounting 4
Sales * PV Ratio - Fixed Expenses
1039500 * 20% - (168000+20000)
$ 19,900.00
Part e
Income Statement for the year
Number of Units 60000
Sales (60000*20) $ 1,200,000.00
Less : Variable costs
Cost of goods sold (60000*14.8)
$
888,000.00
Sales Commission (60000*1.20)
$
72,000.00
Total Variable Expenses
$
960,000.00
Contribution per unit
$
240,000.00
Less: Fixed Cost
Selling Expenses
$
116,500.00
Administrative Expenses
$
51,500.00

Management Accounting 5
Additional Fixed Cost
(Advertisement)
$
20,000.00
Total Fixed Costs
$
188,000.00
Operating Income
$
52,000.00
Part f
In part e the analysis has been undertaken to evaluate the worthiness of arranging an
advertisement campaigns which will cost $ 20000 on an annual basis. The advertisement
expense is a fixed cost in nature as it is a one-time payment that has to be made by Sports
Strength and would not vary with the change in the level of production or sales. The
advertisement campaign will enable the company to make of additional sales of 8025 units.
As a result of increased sales, the operating income (before tax) of the company will also
increase by $ 12,100. Hence, it is advisable to the company to accept the proposal of
undertaking an advertisement campaign. The business of Sports Strength requires all types of
cost to be incurred to operate successfully. It has incurred certain variable costs, fixed costs,
mixed costs and step costs. Fixed costs are those costs which remains same irrespective of the
production level. However, variable cost keeps on changing with the change in the level of
production. The sales commission varies with the level of sales made by the company in this
year. Also the cost of goods sold includes various items such as direct material cost, direct
labour and other overheads. The expenses that are of fixed nature in case of Sport’s strength
are various selling expenses, website hosting cost, rent of credit card processing equipment
and other administrative expenses. The information regarding the cost behaviour can be used

Management Accounting 6
in the decision making process to a significant extent as it will tell the managers of changes in
the level of cost with the change in the level of sales and production is made. It will enable
the managers to determine which activities involve higher costs and how the cost of such
activity will affect the business profitability (Garrison, et. al., 2010). Further, the contribution
margin is the level of sales revenue that remains after the payment of prime cost of
production of variable nature. The contribution margin helps the managers to rank the
products on the basis of their profitability potential. The analysis of contribution margin will
help the manager in undertaking various critical decisions related to the business.
For instance, a manager may use such information to decide whether to introduce a product
or to shut down the existing one from the business to make it more profitable (Hansen,
Mowen & Guan, 2007). If a product has a negative contribution then it shall not be accepted
by the managers. Also, the information in regards to the behaviour of a particular cost to the
change will help the managers to determine whether any change in such cost will provide the
company a benefit or the cost will be exceed the benefits of such expense.
ACTIVITY 2
Part a
Breakeven Point (Units) Total Fixed Cost
Contribution Per Unit
168000
4
Units 42000
Breakeven Point (Dollars) Total Fixed Cost

Management Accounting 7
Contribution Margin
168000
20%
Dollars $ 840,000.00
Part b
Margin of Safety
Total Sales Units-Breakeven Sales
Units
51975-42000
MOS sales Units 9975
MOS sales dollars 1039500-840000
$ 199,500.00
Part c
Total Per unit price
Selling Price 1039500.00 20
Less: Variable Expenses
Cost of Goods Sold 795217.50 15.3
Sales Commission 62370.00 1.2
Total Variable Expenses 857587.50 16.5

Management Accounting 8
Contribution Margin 181912.50 3.5
Total Fixed Cost 168000.00
Operating Profit 13912.50
Decrease in the operating income
Operating income at the same level when the price of
jersey was $ 14.80 $39,900.00
Operating income at the same level when the price is
increased to $ 15.30 $13,912.50
Decrease in the operating income $25,987.50
Part d
Option 1
SP 20.5
Additional Advertisement
Cost 10000
Sales Volume 51975
SP $ 1,065,487.5 20.5
Less: Variable expenses
Cost of Goods Sold $ 795,217.5 15.3
Sales Commission $ 62,370 1.2
Total Variable Expenses $ 857,587.5 16.5
Contribution Margin $ 207,900 4

Management Accounting 9
Less: Fixed Cost
Selling Expenses $ 126,500
Administrative Expenses $ 51,500
Total Fixed Cost $ 178,000
Operating Profit $ 29,900
Option 2
Campaign Cost 5000
Sales Commission % 4%
Increase in sales salaries 220000
Additional Sales Volume 10%
New Sales Volume 57173 (51975*110%)
Sales
$
1,143,450.00 (57173*20)
Less: Variable expenses
Cost of Goods Sold
$
874,739.25 (57173*15.30)
Sales Commission
$
45,738.00 (1143450*4%)
Total Variable Expenses
$
920,477.25
Total Contribution Margin
$
222,972.75

Management Accounting 10
Less: Fixed Cost
Selling Expenses
$
143,500.00
116500+5000+2200
0
Administrative Expenses
$
51,500.00
Total Fixed Cost
$
195,000.00
Operating Profit/(Loss)
$
27,972.75
Part e
The original operating income was $ 39,900. However, with the increase in the price of the
jersey that is purchased from Sport’s Strength from $ 14.80 to $ 15.30 will call for some loss
of operating income generated by J&B Sports during the course of its business operations.
However, the company has a plan of transferring the total increase in price of jersey to the
ultimate customers by increasing the selling price with the same amount i.e. $ 0.50. Thus, the
new selling price of jersey will be $ 20.50. Though, it is obvious that the increase in selling
price of jersey will reduce its demand in the market. Therefore as a part of plan 1, the
company will undertake an advertisement activity that of amount $ 10,000. The increase in
purchase price will be compensated with the increase in selling price of Jersey. However,
additional advertisement cost will increase the level of fixed cost by $ 10,000 that will reduce
the operating income of the company by $10,000.
However, if the reduction in operating income is higher than the advertisement cost, then the
possible reason could be that during the current year the company might purchase more

Management Accounting 11
jerseys from its suppliers at the increased price but it does not sell the same units in the
market and sell some lesser units. Thus, the reduction in operating income more than the cost
of advertisement will only take place in the situation when the units purchased are more than
the units sold.
Part f
MEMO
To: Managers
From: Management Accountant
Date: 22nd November, 2018
Re: Selection of an appropriate plan
As the purchase price of jerseys is increased in the market by $ 0.50 it is necessary for J&B
Sports to opt a plan under which arrangement can be made to avoid the reduction in operating
income as a result of price increase of the material purchased from its suppliers. Plan 1 will
require the company to increase the selling price of Jerseys with the same amount as the
increase in the purchase price. However, the increase in the selling price will certainly reduce
the quantum of sales unit. Therefore, a new advertisement activity will be undertaken by the
company to maintain the level of sales units as constant with the previous sales unit. The net
reduction in the operating income will be $ 10000.
Operating income at the same level when the price of
jersey was $ 14.80 $ 39,900.00
Operating income at the same level when the price is
increased to $ 15.30 $ 29,900.00