Answer:

To,

The Directors of Bonza Handtools Limited

Date: 04.01.2018

Subject: Evaluation of the three present proposals

Respected Sir,

After detailed elaboration regarding the three present proposals, the report was prepared through indicating the impact and advantages of the proposals within the company. These are explained under:

Proposal 1:

Considering the Jan Rossi proposal, the company’s accountant indicated that selling price requires being $140 per unit for increasing its total profit level. The table above clearly indicates that the company can observe a profit increase from $300,000 to $375,000 because of which the amount will boost to $75,000. An increased profit margin can be attained with support of suitable advertising campaign that has expenses of $125,000 (Schmidt, Götze and Sygulla 2015). Conversely, the company’s risk level might be increased in case the advertising campaign is not capable to gather attention of the consumers. Because of this, there will be significant drop in the company’s promotion and advertising expense.

Proposal 2:

The production manager of Bonza Handtools Limited that is Tom Tune, indicated that certain product quality improvement might be attained through enhancing total sales volume by 25% along with variable cost by $5 per unit. It can be supported through promotional tool use that amounts to $50,000 (Seuring and Goldbach 2013). Conversely, the advertising campaign expense is less in comparison to the first proposal that can result in increased profit of $75,000. This is due to the consumers’ satisfaction level with improvement in the product quality.

Proposal 3:

The sales manager of the company that is Mary Watson explained that the selling price each unit is needed to be decreased by $10 in the initial three months of the financial year (Rieckhof, Bergmann and Guenther 2015). In addition, the requirement for experiencing $40,000 is present as a part of advertising expense in order to attain a profit of $60,000. Moreover, such approach cannot offer any positive result for the company in the upcoming years. This due to the reason that the consumers might perceive the price of product has decreased as the company has compromised with quality of products and for this reason, the capability of revenue generation of the company can be decreased (Pettersson and Segerstedt 2013).

Recommendations:

From the above analysis, the directors of Bonza Handtools Limited are advised to accept proposal from the production manager of the company that is Tom Tune. This is due to the reason that the manager has centered on improving the product quality along with total sales volume. This might facilitate of gathering profit of around $75,000. Despite an identical profit level as the accountant’s proposal, there is increased risk factor in the final proposal due to further concentration on the advertising and promotional campaign (Kokubu 2013).

Answer 2: The Tassie Company

The table below has been prepared relied on the recent plan along with certain proposed manufacturing capacities of the company relied on the following information:

Production capacity of the factory at 200,000 units per year:

From the above information, it is gathered that Tassie Company might produce 200,000 units each year. Moreover, the company is focused on producing 150,000 units with respect to the recent plan (Bebbington, Unerman and O’Dwyer 2014). In this scenario, the company is not required to compromise its own manufacturing level for bidding the production of 40,000 product units associated with government department. For this reason, the company might be capable to sell the goods at $10.8 each unit that is attained through totaling variable cost, fixed cost along with 20% markup on the cost price (Otley and Emmanuel 2013).

Manufacturing ability of the factory with 180,000 units each year:

Relied on the current situation, the Tassie Company might manufacture more than 180,000 units each year and conversely, the present production level is around 150,000 units each year. For this reason, the company is needed to give away 10,000 units of individual production, within which it attains profit of around $2.50 each unit in order to accept the government contrast (Drury 2013). Therefore, for initial beginning 30,000 units, the first price can be $10.80 and for some more units, the amount might be $13.30 each unit. Moreover, the overall average price of 40,000 units has been recorded at $11.43 (Klychova et al. 2015).

Importance of activity-based costing with different overhead cost pools for pricing

“Activity-based costing” and “segmented overhead cost pools facilitate in allocation of incurred amount on a particular activity relied on the department head (Kim and Sohn 2013). Considering the activity based costing, the allocated cost for activity based on the time devoted amount within the production department for products and services production. The cost pool indicates certain direct cost, while the anticipated hours might be recognized in the cost driver form. This might facilitate in cost decrease, preparing competitive pricing strategy along with a boost in business profit (Klychova et al. 2015). For instance, certain supervision charges might be apportioned relied on total staff numbers within the particular department.

Question 4: Role of overhead segmentation in allocating overhead costs to individual jobs or services

The overhead segmentation might be advantageous in cost ascertainment which is not explained within the course of normal business while anticipating overhead expenses and these are not associated with it (Fullerton, Kennedy and Widener 2014). The expenditures and income might be apportioned to every manufacturing department that might facilitate in knowing the segments of business that is increasingly profitable. In contract to that, if the company centres on a particular product, the overhead expenses might be efficient that might facilitate managers in anticipation of profitability of the product line. Moreover, the accountant of a particular company might recognise overhead that might result in differences in the product profit whether negatively or positively (Fullerton, Kennedy and Widener 2013). The overhead expenses might be separated in several expenditure headings that might facilitate cost ascertainment for certain jobs or services. Few examples are presented in a table form as below:

References:

Bebbington, J., Unerman, J. and O’Dwyer, B. eds., 2014. Sustainability accounting and accountability. Routledge.

Drury, C.M., 2013. Management and cost accounting. Springer.

Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2013. Management accounting and control practices in a lean manufacturing environment. Accounting, Organizations and Society, 38(1), pp.50-71.

Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2014. Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices. Journal of Operations Management, 32(7), pp.414-428.

Kim, J.B. and Sohn, B.C., 2013. Real earnings management and cost of capital. Journal of Accounting and Public Policy, 32(6), pp.518-543.

Klychova, G.S., Zakirova, A.R., Zakirov, Z.R. and Valieva, G.R., 2015. Management aspects of production cost accounting in horse breeding. Asian Social Science, 11(11), p.308.

Kokubu, K., 2013. Material Flow Cost Accounting: Significance and Practical Approach∗. In Handbook of sustainable engineering (pp. 351-369). Springer Netherlands.

Otley, D. and Emmanuel, K.M.C., 2013. Readings in accounting for management control. Springer.

Pettersson, A.I. and Segerstedt, A., 2013. Measuring supply chain cost. International Journal of Production Economics, 143(2), pp.357-363.

Rieckhof, R., Bergmann, A. and Guenther, E., 2015. Interrelating material flow cost accounting with management control systems to introduce resource efficiency into strategy. Journal of Cleaner Production, 108, pp.1262-1278.

Schmidt, A., Götze, U. and Sygulla, R., 2015. Extending the scope of Material Flow Cost Accounting–methodical refinements and use case. Journal of Cleaner Production, 108, pp.1320-1332.

Seuring, S. and Goldbach, M. eds., 2013. Cost management in supply chains. Springer Science & Business Media.