Management Accounting Report: Incremental Analysis for Coyle Company

This report presents an incremental analysis for Coyle Company, evaluating a make-or-buy decision and the performance of the Southern Division. Part A of the report provides an incremental columnar analysis comparing the costs of producing a product internally versus purchasing it from an external supplier. The analysis includes calculations of relevant costs, opportunity costs, and total costs, leading to a recommendation to purchase from the supplier. Part B focuses on the Southern Division, examining the potential impact of its elimination on the company's profitability. The analysis considers sales, cost of goods sold (both variable and fixed), and operating expenses to determine the net effect of the division's removal. The report concludes that eliminating the Southern Division would decrease profit, highlighting the importance of considering internal and external factors, including fixed costs and production capacity, when making such decisions. The report references academic sources to support the analysis and recommendations.

MANAGEMENT
ACCOUNTING PORTFOLIO
AND ANALYSIS

TABLE OF CONTENTS
PART A...........................................................................................................................................3
1 Incremental Columnar report for Coyle company....................................................................3
2 Recommendation to Coyle company........................................................................................3
PART B............................................................................................................................................4
Incremental Analysis of the Southern Division. .........................................................................4
REFERENCES................................................................................................................................6

PART A
1 Incremental Columnar report for Coyle company
Incremental analysis report
Particulars Cost per unit Make Buy
Incremental –
Increase/(Decease)
Purchase 11 88000 -88000
Direct materials 5.625 45000 45000
Direct Labour 1.5 12000 12000
Variable
manufacturing
overhead 1.25 10000 10000
Fixed
Manufacturing
overhead 1.875 15000 -15000
Total Relevant
Cost 10.25 82000 88000 -36000
Particulars Make Buy
Incremental –
Increase/(Decrease)
Relevant Cost 82000 88000 -6000
Opportunity cost 20000 22000
Total costs 102000 -16000
2 Recommendation to Coyle company
Incremental analysis is also known as relevant cost method as it focuses over relevant
costs associated with project and ignores the sunk cost. Buy or make analysis is used for
analysing difference to make product within the organisation or to buy it from outside suppliers.
Managers of the company have to decide whether firm will be profitable or not. The method is
used for measuring results of operations and also identifying relevant revenues and cost that will
be incurred associated with the alternative decisions (Fernando and Hermawan, 2019). In the

present case Coyle has received an offer for product to get at 11 where the cost of producing the
product internally is 10.25. If company makes purchase from outside sources it will not incur
fixed cost related of machine. Company will not be required to incur cost of depreciation as the
product will be manufactured elsewhere and company will be purchasing directly from the
suppliers. If the company purchases it from market it can use the machine elsewhere which will
bring contribution for the company of 22000. From the above analysis it could be evaluated that
the business should purchase from outside as it will bring benefits to company of around 16000.
Though the cost of product from supplier is higher than internally produced product but
opportunity cost is higher in this case (Fabbrocino and et.al., 2019). Therefore company should
accept the offer from supplier that is providing the product at 11 as company will earn additional
16000 by using machine for other product.
PART B
Incremental Analysis of the Southern Division.
Continue Eliminate
Net income
increase/(decrease)
Sales 480000 0 -480000
Cost of Goods Sold 400000*80% 320000 0 -320000
Operating Expenses 140000*70% 98000 0 -98000
Total Variable cost 418000 0 -418000
Contribution
margin 62000 0 -62000
Fixed Cost
Cost of Goods Sold 400000*20% 80000 80000 0
Operating Expenses 140000*30% 42000 27000 -15000
Net Profit /(Loss) -60000 -107000 -47000
Analysis
In the present case company is having southern division and other divisions. In both the
divisions southern division is suffering losses. Due to this company is planning to remove
southern division from the company and keeping only three divisions. Company is having both

divisions presently cost of goods sold consists of 80% variable and 20% fixed and 70% of cost
in operating expenses is variable and remaining 30% is fixed. Eliminating the southern division
will reduce the costs and revenues earned by the company. Due to this the total cost of company
is reduced. Suggestion of the accountant to remove the southern division will increase the total
cost by 60000. However, the fixed cost of southern division related to operational cost will only
be eliminated up to the levels of 15000. Remaining cost have to be incurred by the company
even if eliminates the division fully.
Incremental analysis shows that the costs will be decrease the profits by 47000 more and
not increase by 60000. Recommendation of the accountant is not viable as it will decrease the
profit levels as it has to incur the fixed cost even if the division is eliminated. Internal and
external factors affecting the business if considered will also be affecting the business (Krishnan
and Raghavan, 2020). Internal factors influencing the business decisions is fixed costs and
variable costs. It has to incur fixed cost that reduces the profit levels of other three divisions.
Eliminating the company will also reduce the production capacity of the company as
whole. It will not be able to meet the demand on eliminating the southern division. The losses
from southern division could be reduced by making structural change that reduces the fixed cost
of company

REFERENCES
Books and Journals
Fernando, K. and Hermawan, A.A., 2019, July. Relative and Incremental Value Relevance of
Accounting Information under the Integrated Reporting Approach: Evidence from South
Africa. In Asia Pacific Business and Economics Conference (APBEC 2018). Atlantis
Press.
Fabbrocino, F and et.al., 2019. Ductility-based incremental analysis of curved masonry
structures. Engineering Failure Analysis.97. pp.653-675.
Krishnan, S. and Raghavan, J., 2020. Incremental Analysis. In Chemical Rockets (pp. 251-293).
Springer, Cham.