Finance Assignment: Management Accounting Analysis and Recommendations

This document provides a comprehensive solution to a Management Accounting assignment focusing on the Okinawa Company. The solution addresses two key scenarios: a special order decision and a make-or-buy decision. The special order analysis calculates the contribution margin, profit, and loss associated with accepting the special order, considering relevant and irrelevant costs, and qualitative factors such as market expansion, resource utilization, customer base, and potential impact on reputation. The make-or-buy analysis compares the profitability of manufacturing a BLK component versus purchasing it from an overseas company, calculating profits under both scenarios and identifying extra profits. It also discusses irrelevant costs in the decision-making process. The solution emphasizes the importance of considering both financial and qualitative factors, including quality, timeliness, managerial efficiency, long-run implications, and the company's reputation, to make informed business decisions. The document includes a detailed bibliography of relevant sources.

MANAGEMENT ACCOUNTING

Part B
Answer 1.
(a) Okinawa had a normal capacity of production equal to 82000 units. However, due to
downturn in the business it could produce only 65000 units. Therefore, there was a
spare capacity of 17000 units.
Normal Capacity 82000
Capacity in use 65000
Spare capacity 17000
The company received a special order of producing 15000 units. The company can
accept the offer on the basis of spare capacity. However, it also has to check the
profits earned on accepting the special order to take the final decision.
Calculation of contribution (per unit)
Particulars Amount
Selling price per unit 70
Less: Direct material 33
Less: Direct labour 22.5
Less: Variable overhead 11.5
Contribution per unit 3
Note: Assuming that the variable selling cost is the transportation cost and hence, it
has not been taken into consideration while doing the calculations and also it has been
mentioned that no sales commission is involved.
Calculation of contribution on 15000 units
Contribution per unit 3
Number of units 15000
Total contribution 45000
Calculation of profit / loss on acceptance of the special order
Total contribution 45000
Less: Purchase of logo labelling machine 12000

Add: Scrap value 850
Actual profit on acceptance of special order 32150
Since, the company is earning a profit of 32150 it must accept the special order.
(b) The costs that are irrelevant in the process of decision making are the fixed cost that
was being incurred earlier also. However, if there is any special fixed cost incurred
due to this special order then such fixed cost must be taken while doing the
calculation. All the fixed cost will be incurred irrespective of the fact that the special
order is accepted or rejected. Therefore, they are considered irrelevant in the process
of decision making. In this sum, the purchase of the logo labelling machine was an
extra cost incurred due to the special order and so it has been taken into consideration.
Secondly, if there is any cost that the customer promises to reimburse then such cost
will also not form part of solution. In this sum, the customer has promised to pay the
transportation cost and therefore, it has not been deducted. (Donanldson, 2012)
(c) The qualitative factors that Okinawa Company should consider while taking a final
decision are:
 The special order was received from the customers that are geographically separated.
So, the supply of the product in that area might expand and create demand for the
product there. This would result in the expansion of the business and has also helped
the business enter into a new market.
 A company should always utilise its resources in an optimum manner. However, the
production capacity was underutilised because of the downturn in business and
therefore, it would be beneficial to accept the order and make best use of its existing
resources. (Freeman, 2011)
 A company always aims at strengthening its customer base. However, along with the
satisfaction of the existing customers, the new customers are always welcomed
because they will help the company to expand and grow substantially which the
company always aims for.
 A special order should be accepted or rejected after looking upon the future prospects.
A company should not accept the offer by hurting the existing customer in any
manner. If the company compromises with the quality or service of the product due to

the acceptance of the special order then it may hurt the reputation of the company and
can be proved costly in the long run. (Mattessich, 2016)

Answer 2.
(a) The Okinawa Company can either make the BLK product itself or may buy it from
the overseas company. However, it can take decision on the financial grounds by
comparing the profitability in both the situations. (Pratt, 2009)
Calculation of profit when Okinawa makes the BLK component
Particulars Amount
Selling price 7800000
Less: Direct material 2015000
Less: Direct labour 1462500
Less: variable overhead 747500
Contribution 3575000
Less: Fixed overhead 1170000
Less: Variable selling expenses 97500
Less: Fixed selling cost 75000
Profit 2232500
If the company makes the BLK product it will have to incur both manufacturing as
well as selling cost. Therefore, both of them has been deducted from the selling price
in order to ascertain profits
Calculation of profit if BLK buys the BLK component from overseas
Particulars Amount
Selling price 7800000
Less: Purchase price 4680000
Less: Variable selling expenses 97500
Less: fixed selling cost 75000
Profit 2947500
The selling price is incurred irrespective of the fact whether the company will make or
buy the BLK product.

The BLK product should be bought from the overseas company as it will earn extra
profits when compared to the making of the BLK product.
Calculation of extra profit
Profit on purchasing from overseas 2947500
Profit on manufacturing 2232500
Extra profit 715000
(b) The cost that is considered irrelevant while calculating the profit in the situation when
the company purchases BLK components include the cost incurred in the
manufacturing process. Also, when there is no manufacturing done there will be no
wear and tear of the machinery and therefore, there will be no depreciation expense
charged to the profit and loss account. Since, the special offer is accepted because of
higher profitability the equipment has been sold but nothing is realised of it.
Therefore, it is considered as irrelevant cost. (Rogers, 2015)
(c) A company cannot take any decision based on financial grounds only; it has to look
upon the non financial grounds also. The qualitative factors that Okinawa company
should consider in the process of decision making are –
 Quality of the component – Even if the company has a higher profitability on the
acceptance of this special offer, it should always check the quality of the product.
An inferior quality may lead to lose of faith of customers in the company.
 Timeliness – We should see if the company will be able to provide the products as
and when required because if they are not able to supply on time then the
Okinawa Company may lose orders. (Rosenfield, 2009)
 Managerial efficiency – The managers and the workers of the company will be
able to focus on the manufacturing of other components in the company which
would increase the operational efficiency of the company.
 Long run – The overseas company is providing at a lower cost but the Okinawa
Company should also make sure whether it would be able to provide at such lower
cost in future or not because shutting down production for a short run benefit is
not favoured.
 Reputation of the company –The Company must be having some brand image or
goodwill in the company so if there is a change in the quantity or any other