Answer to Question 1
Requirement a
Particulars |
Amount |
Operating Profit per unit from OS2 |
$568 |
Less: Development Cost |
-$150 |
Less: Marketing & Administrative Cost |
-$85 |
Net Operating Profit |
$333 |
As per the case study which is provided the management of Valdivia Company which is engaged in production of remote control Helicopters is considering introducing OS2 Model of the Helicopters which will be an upgraded version of OS1 Model. The relevant revenue of the business which is can be identified is the sales revenue of the business (Velu & Stiles, 2013). The relevant costs of the business which is identified are direct material and labour costs of the business and also the overhead costs of the business.
The management should wait for clearing the stocks of OS1 Models of the business and then introduce the OS2 model as in this way the business will not face significant losses. The management should wait till 1st January 2019 for introducing the OS2 models of Helicopters in the market. This will give the management ample time to clear the overstocked OS1 model before the product becomes out of fashion in the market (Pettigrew, 2014). The costs which are irrelevant in case of the business are development costs and Marketing and administration costs which are incurred by the business. These costs are fixed in nature and the business will be incurring the same for whatever decision is taken by the general manager.
The four qualitative factors which must be considered by the general manager of the business before arriving at an appropriate decision for selection of product models are listed below:
Answer to Question 2
Requirement a
Tables |
Chairs |
Tables |
Chairs |
|||
Particulars |
4000 |
24000 |
TOTAL |
8000 |
24000 |
TOTAL |
Revenues |
$1,000,000 |
$2,000,000 |
$3,000,000 |
$2,000,000 |
$2,000,000 |
$4,000,000 |
Variable Direct Material & Direct Labour Costs |
-$600,000 |
-$1,050,000 |
-$1,650,000 |
-$1,200,000 |
-$1,050,000 |
-$2,250,000 |
Depreciation on Equipment Used |
-$84,000 |
-$116,000 |
-$200,000 |
-$179,000 |
-$116,000 |
-$295,000 |
Fixed Marketing & Distribution Cost |
-$80,000 |
-$202,500 |
-$282,500 |
-$80,000 |
-$202,500 |
-$282,500 |
Variable Marketing & Distribution Cost |
-$60,000 |
-$67,500 |
-$127,500 |
-$120,000 |
-$67,500 |
-$187,500 |
General Administration Costs |
-$220,000 |
-$440,000 |
-$660,000 |
-$330,000 |
-$330,000 |
-$660,000 |
Corporate Office Cost |
-$100,000 |
-$200,000 |
-$300,000 |
-$150,000 |
-$150,000 |
-$300,000 |
|
|
|||||
Operating Profit |
-$144,000 |
-$76,000 |
-$220,000 |
-$59,000 |
$84,000 |
$25,000 |
As per the table which is shown above, the management of Caleta Division of Puerto Ltd, produces 400 tables and 24000 chairs. If the company increases the chairs by 4000 more than as shown in the table above, it would be beneficial for the business. In this case the operating profit which is earned by the business is also appropriate if the management offers 4000 chairs more.
The fixed marketing expenses and the depreciation expenses of the business can be considered to be irrelevant costs of the business. These costs are irrelevant as the same will be incurred no matter what decision is taken by the management.
Requirement b
Tables |
Chairs |
Tables |
Chairs |
|||
Particulars |
4000 |
24000 |
TOTAL |
0 |
24000 |
TOTAL |
Revenues |
$1,000,000 |
$2,000,000 |
$3,000,000 |
$0 |
$2,000,000 |
$2,000,000 |
Variable Direct Material & Direct Labour Costs |
-$600,000 |
-$1,050,000 |
-$1,650,000 |
$0 |
-$1,050,000 |
-$1,050,000 |
Depreciation on Equipment Used |
-$84,000 |
-$116,000 |
-$200,000 |
-$84,000 |
-$116,000 |
-$200,000 |
Fixed Marketing & Distribution Cost |
-$80,000 |
-$202,500 |
-$282,500 |
$0 |
-$202,500 |
-$202,500 |
Variable Marketing & Distribution Cost |
-$60,000 |
-$67,500 |
-$127,500 |
$0 |
-$67,500 |
-$67,500 |
General Administration Costs |
-$220,000 |
-$440,000 |
-$660,000 |
$0 |
-$440,000 |
-$440,000 |
Corporate Office Cost |
-$100,000 |
-$200,000 |
-$300,000 |
$0 |
-$300,000 |
-$300,000 |
|
|
|||||
Operating Profit |
-$144,000 |
-$76,000 |
-$220,000 |
-$84,000 |
-$176,000 |
-$260,000 |
The operating costs which is earned by the business in case the business decides to offer 4000 tables and 24000 chairs are immense and therefore the business shows losses which suggest that the business needs to shut done.
Answer to Question 3
Irrelevant costs are those costs which are incurred by the business which do not affect the decision-making process of the business (Drury, 2013). Sunk cost is one type of irrelevant costs of the business. As the cost are repetitive and not considered in the decision-making process of the business therefore such costs are known as irrelevant costs of the business (Collier, 2015). It is generally seen that non-cash items are mostly irrelevant costs of the business and examples can be given such as depreciation and amortization expenses incurred by the business.
Reference
Collier, P. M. (2015). Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.
Drury, C. (2013). Costing: an introduction. Springer.
Fullerton, R. R., Kennedy, F. A., & Widener, S. K. (2014). Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices. Journal of Operations Management, 32(7-8), 414-428.
Noreen, E. W., Brewer, P. C., & Garrison, R. H. (2014). Managerial accounting for managers. New York: McGraw-Hill/Irwin.
Pettigrew, A. M. (2014). The politics of organizational decision-making. Routledge.
Velu, C., & Stiles, P. (2013). Managing decision-making and cannibalization for parallel business models. Long Range Planning, 46(6), 443-458.
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