Accounting 403 Mod 4 SLP - Managerial Accounting - Budgeting
Managerial Accounting - Budgeting
Differential analysis involves knowing which costs are relevant, i.e. future costs that vary among alternatives. It is important to know what information to use and not just how to execute the analysis.
Below find production and sales information for Lewis Company.
|
Product information |
Prod B |
|
Beginning inventory |
0 |
|
Units produced |
10,000 |
|
Units sold |
9,000 |
|
Selling price per unit |
$300 |
|
Variable costs per unit |
|
|
Direct material |
120 |
|
Direct labor |
60 |
|
Variable overhead |
40 |
|
Variable selling and administrative |
10 |
|
Fixed costs |
|
|
Fixed manufacturing overhead |
250,000 |
|
Fixed selling and administrative |
100,000 |
|
Lewis Company |
|
|
Absorption Income Statement |
|
|
For the period ending Dec. 31, 2015 |
|
|
Sales |
$2,700,000 |
|
Cost of goods sold |
2,205,000 |
|
Gross profit (margin) |
$495,000 |
|
Selling and administrative expenses |
190,000 |
|
Net income |
$305,000 |
Lewis Company receives an offer to make a new product, called C, for a new customer. The customer wants to buy 1,100 units. Product C has the same cost structure as product B with three exceptions. The new customer is only willing to pay $260 per unit, direct materials costs will decrease by $10 per unit and Lewis does not have to incur any variable selling and administrative expenses.
•Make a list of the expenses and amounts that are relevant for this decision. How much with the sale of this product contribute to the profitability of Lewis?
•What if the company only pays $210 per unit? How does this change the contribution towards profitability?
•If you were the manager, would you accept this order? What considerations, other than financial would enter into your decision?
Two to Four page explanation.
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Solution: Accounting 403 Mod 4 SLP - Managerial Accounting - Budgeting