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Management Accounting Assignment detailing bookkeeping procedures used by Pacific Telemet Ltd and Go-Go-Grow Ltd

Question

Question 1: Pacific Telemet Ltd. manufactures a high end smart phone with dual sim cards that is popular with business executives who travel overseas frequently. Related financial data for this product for the last year is as follows:

Sales                                     12,000 units
Selling price                      $460 per unit
Variable manufacturing cost    $184 per unit
Fixed manufacturing costs     $360,000
Variable selling and administrative costs     $36 per unit
Fixed selling and administrative costs     $600,000

The CEO is under pressure from the Board of Directors to increase the profitability of the phones and has asked executives from different departments for suggestions. Three managers have responded with the following ideas:

  1. The production manager, David Groate, suggests making improvements to the quality of the product. These quality improvements would increase the variable costs by $36 per unit. This would be accompanied by a $60,000 national advertising campaign which he expects would boost sales volume by 30%.
  2. The sales manager, Kirsten Arnold, believes that the product is unique, but not yet well known enough. Based on her market research, she feels that advertising should be increased by $120,000 and that the product would also be able to bear an increase in price of $60 with sales volume reduced by 12% from the current levels.
  3. The marketing director, Jess Sutherland, wants to undertake a promotion campaign where a $40 rebate is offered to the first 2,500 phones sold. She expects that the rebate program would boost sales by an additional 2,000 units if spending on advertising was increased by $50,000.

You have been asked by the CEO, Sherri Watkins, to comment on each of these three proposals before she presents them to the Board of Directors. Draft a report in response to this request. You are not asked to make one particular choice or recommendation, but rather to explore the potential strengths and weaknesses that includes discussion on the breakeven, potential profits and, where possible, the margin of safety related to each proposal. Keep in mind that the sales volumes should be treated as estimates only and your report should consider potential variations in actual sales and their effects. Give both qualitative and quantitative support to your comments.

Question 2: You are the accountant for Go-Go-Grow Ltd, a children's electric toy car manufacturer that is located in Geelong and has customers in Australia and the USA. Their estimated current sales volume is 5,000 units per month and based on this level of production, the company has budgeted the following costs and prices per unit:

Manufacturing Costs per unit (Based on production of 5,000 units per month)

Direct Material Cost $150.00
Direct Labour Cost 75.00
Variable Factory Overhead 35.00
Fixed Factory Overhead 40.00
Total Manufacturing Cost 300.00
Selling & Administrative Costs Variable Selling and Administrative Cost 35.00
Fixed Selling and Administrative Cost 25.00 60.00
Total Cost Per Unit 360.00
Selling Price Per Unit $720.00

Mantel Ltd is an overseas company that sells toy cars all over the world, with the majority of their market to wealthy new parents in China and India. They have approached Go-Go-Grow about obtaining a quote for a special one-off order as they would like to purchase 20,000 toy cars. As this will be a special order sale, there will be no costs incurred for variable selling and administrative costs and no additional fixed costs will be incurred.

This order is because their existing supplier has suffered substantial earthquake damage to their premises, but the CEO of Mantel Ltd also hinted to your CEO that if they are satisfied with the product, this might not be the last deal between the two businesses.

Required:Given this knowledge, what amount should Go-Go-Grow Ltd. bid for this contract in each of the following circumstances:

  1. The Go-Go-Grow’s annual factory capacity is 90,000 units.
  2. The Go-Go-Grow’s annual factory capacity is 75,000 units. (To fulfil the order, you may have to pull the product from your regular production)

Assuming that the annual factory capacity is 90,000 units, prepare a report for your CEO explaining your justification for the bid price that you came up with in 1 a). Discuss the possible opportunities and potential disadvantages with accepting this contract with Mantel. Give both quantitative and qualitative support to your discussion.

Question 3 : Describe your own background before you came to do your MBA at Southern Cross University.

How has your earlier educational background influenced your understanding of this subject so far?

When you complete ACC00724, which accounting tools in either Financial or Management accounting do you think will be most useful for your future career? Why?

Answer

Answer 1- Pacific Telemet Ltd.
Specific Telemet Limited is a business organization producing smartphones with dual SIM cards and this product of the company is very popular among the executives that are traveling overseas on a frequent basis. According to the current pricing strategy of the company profits made by the company are as follows-

Particular

Amount ($)

Sales (Units)

12000

Selling price

460

Variable cost

184

Contribution

276

Contribution (Amount)

3312000

Variable selling and administrative cost

432000

Fixed manufacturing cost

360000

Fixed cost

600000

Profit

1920000

Board of director has pressurized chief executive officer of the company to increase the sales in an incoming financial year. For this purpose, three managers have proposed two different kinds of strategies. Evaluation of these strategies is as follows-

The strategy of production manager David Groate : Production manager has suggested increasing the overall advertisement expenses by $60,000 along with increasing the quality of products. Increasing the quality of the product will also increase the variable cost by $36 per unit. After this strategy the profitability of the company will increase and revised the statement of profitability is as follows-

Particular

Amount ($)

Sales (Units)

15600

Selling price

460

Variable cost

220

Contribution

240

Contribution (Amount)

3744000

Variable selling and administrative cost

561600

Advertisement cost

60000

Fixed manufacturing cost

360000

Fixed cost

600000

Profit

2162400

On the basis of this profitability statement, it can be said that overall profit generated by the company has increased by 10% as compared to the original profitability of the company. Contribution margin in the given scenario is 52% and total fixed expenses are $1020000, therefore break-even sales would be $1961538. Break-even sales in this given scenario is substantially lower as compared to sales made by the company in the last financial year i.e. $5520000 (Weygandt, Kimmel & Kieso 2015). On the basis of this analysis, it can be said that this proposal is very positive when it is expected to have a positive impact on the overall profitability of the company. There are some weaknesses that should be considered by the chief executive officer before the execution of this strategy. It is important for the company to find an effective method of advertisement so that 30% increase in sales unit can be achieved. It is very difficult for a business organization to increase 30% of its sales within a period of one year only through advertisement expenses (Noreen, Brewer & Garrison 2014).

The strategy of sales manager Kirsten Arnold: The sales manager of the company has read market research and proposed to increase the overall advertisement expense by $120000. This expenses expected to increase the overall price of the mobile phone by $60 but it will also decrease the overall sales unit by 12%. Profitability of the company in this given scenario would be as follows-

Particular

Amount ($)

Sales (Units)

10560

Selling price

520

Variable cost

184

Contribution

336

Contribution (Amount)

3548160

Variable selling and administrative cost

380160

Advertisement cost

120000

Fixed manufacturing cost

360000

Fixed cost

600000

Profit

2088000

It can be seen that the overall profitability of the company has increased by 8.75% if the proposed strategy of the sales manager is implemented. In this case break, even sales would be $2076923 (1080000/52%) which is also substantially lower as compared to current sales of the company. Therefore it can be said that the strategy will also have a positive impact on the profitability of the company. The main problem of the strategies that overall sales unit will decrease substantially i.e. by 12%. This means that the market share of the company will decrease by 12% if this strategy is adopted due to the increase in overall sales price of the mobile phones. Shifting of customers from our business organization to our competitors can have a negative impact on long term existence of the company in the market (Kaplan & Atkinson 2015). It is proposed that this strategy should not be adopted as it would result in a decrease in market share and the increasing profitability is not very substantial as compared to the previous option.

Strategy offered by marketing director Jess Sutherland: According to the marketing director, a new campaign should be started to wear selling price of the product should be lowered by $40 for the first 2500 phones. In addition to that, there will be an advertisement expense of 50,000 towards this campaign and this campaign is expected to increase the overall sales unit by 2000 units. Profitability of the company according to this strategy would be as follows

Particular

Amount ($)

Sales (Units)

14000

Selling price (on first 2500 units)

420

Selling price (on remaining 11500 units)

460

Variable cost

184

Contribution (on first 2500 units)

236

Contribution (on remaining 11500 units)

276

Contribution (Amount)

3764000

Variable selling and administrative cost

504000

Fixed manufacturing cost

360000

Advertisement cost

50000

Fixed cost

600000

Profit

2250000

If this is strategy is successful than the overall profitability of the company is expected to increase by 17.18%. The rate of increasing profitability is hired in this strategy if all the three strategies proposed by the different managers is compared. In addition to that additional expenditure on advertisement campaign is also lowest in the case of this strategy. One factor that should be considered by a chief executive officer of the company is the effectiveness of this campaign. Market research can be conducted by the company on whether this strategy expected to have a positive impact on overall sales units of the company or not.

After evaluating all the three strategies it can be said that all of these strategies have a positive impact on the profitability of the company. It is recommended that the management of the company should accept the strategy proposed by the marketing director or production manager (Collier 2015). The strategy proposed by the sales manager should not be accepted by the company as it will result in decreased market share in the industry which will have a negative long term impact on the company. Out of the other two strategies, it is recommended that strategy proposed by marketing director should be accepted because it has increased overall market share of the company by selling 2000 additional mobile units and overall marketing expenditure, in this case, is also comparatively lower.

Answer 2- Go-Go-Grow Ltd
Go-Go-Grow Ltd is in the business of producing children's electronic toy cars and has customers in Australia and USA. Total demand for these products is around 5000 per month i.e. 60000 units can be easily sold by the company in a particular financial year. Mental Limited is an Overseas company that has a proposed to purchase an order of 20000 toys directly from the company listen to the current demand of products produced by Go-Go-Grow Ltd. this is a special order and there will be no requirement of spending variable selling and administrative cost and the additional fixed cost will also be nil.

(A) When annual factory capacity is 90000 Units

Total demand of the product in the market is 60000 to units and capacity of the company is 90000 units, therefore there is a spare capacity of 30000 unit which can be made by a company without increasing the capacity of the company. Therefore the price charged for every unit of toy car sold to Mantel Limited will be as follows-

Particular

Amount ($)

Direct Material Cost

150

Direct Labour Cost

75

Variable Factory Overhead

35

Total Cost Per Unit

260

Total contract price would be 260*20000= $5200000

Note- there will be no variable selling and distribution cost because this is a direct offer and selling and advertisement is not required (Nagle & Müller 2017).

(B) When annual capacity is 75000 units
Total annual capacity of the company is 75000 unit whereas the total demand in the open market is 60000 units. The remaining capacity of the company is 15000 and company has to fulfill an order of 20000 units to Mantel Limited. For fulfillment of this order, company has to reduce the total number of products sold in open market to 55000 units only and the cost of 5,000 units will be recorded as an opportunity cost in the price charged from Mantel Limited (Langfield-Smith et.al. 2017).

The contract price for 20000 unit will remain the same i.e. $5200000 but the opportunity cost of 5000 units will be added to this contract price. The opportunity cost would be as follows-

Particular

Amount ($)

Selling price

720

Direct Material Cost

150

Direct Labour Cost

75

Variable Factory Overhead

35

Variable selling and Administrative overheads 

35

Contribution

425

Total contract price= $5200000+ (425*5000) = 7325000
Number of units= 20000
Price per unit= $366.25

Business report
12-01-2019
Chef Executive officer
Go-Go-Grow Ltd
Geelong, Australia

This business report is prepared to explain the price that is determined for the one-off contract offered by Mantel Limited for production of 20000 to units of toy cars in the coming financial year. Currently the annual capacity of the company is around 90000 units and total demand for products in the open market is 60000 units. Therefore there is a spare capacity of 30000 unit which is not currently being used by the company. This is their capacity can be used in order to fulfill the demand of 20000 units by Mantel Limited. Acceptance of this contract will definitely have a positive impact on the profitability of the company and it will also increase possible contracts in the future by this organization.

In the given case, the contract price is established in the same manner as compared to the normal pricing strategy of the company. The only difference, in this case, is that expenses in relation to variable selling and administrative cost are excluded from the product price. This is due to the fact that our business organization is not required to conduct any type of selling and administration cost of these 20,000 units because it will be directly sold to Mantel Limited (Lavia López & Hiebl 2014).

Different business opportunities might arise out of accepting this contract as other business organizations might come with one-off contracts which will be helpful in utilizing the spare capacity of the company. On the other hand the disadvantages of this company is that it might distract out business organization from gaining a substantial amount of market share in the company if these type of contract increases in the future.
Accountant
Go-Go-Grow Ltd

Answer 3- Educational background
My educational background has enables my experience and understanding of the MBA course as Southern Cross University. I have completed the bachelors of commerce degree in the year 2012. This degree of taken from Gujarat University in India and my passing percentage at this course was 64%. In addition to that I have also worked as room attendant in Hotel the Grand Bhagvati and my responsibilities during this job was to assist housekeeping and maintenance department. This experience has provided me knowledge in relation to the manner in which actual business organization operates.

I have studies business administration, accounting and finance during my bachelor of commerce degree. Knowledge acquired from studying these subjects helped me in understanding the MBA course at the university as these subjects are explained in details in MBA course. Combined knowledge of MBA and bachelors of commerce will help me in understanding the financial and management accounting concepts that are being used in actual business organizations. My bachelors of degree will also help in developing an effective and efficient resume after I have completed the MBA. Combination of these degree will help in getting better job opportunities.

Management accounting tool
After completing the assignment ACC00724, it can be said that pricing and costing tools of Management Accounting will be very useful in career development for the future. This is due to the fact that the majority of business organizations struggle to assign proper pricing to the product and services offered by them. By use of these pricing and costing tools, proper direction can be provided to the business organization and it will also very helpful in career development.

Reference
Collier, P.M 2015. Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.

Kaplan, R.S. and Atkinson, A.A 2015. Advanced management accounting. PHI Learning.

Langfield-Smith, K., Smith, D., Andon, P., Hilton, R. and Thorne, H 2017. Management accounting: Information for creating and managing value. McGraw-Hill Education Australia.

Lavia López, O. and Hiebl, M.R 2014. Management accounting in small and medium-sized enterprises: current knowledge and avenues for further research. Journal of Management Accounting Research, 27(1), pp.81-119.

Nagle, T.T. and Müller, G 2017. The strategy and tactics of pricing: A guide to growing more profitably. Routledge.

Noreen, E. W., Brewer, P. C., & Garrison, R. H 2014. Managerial accounting for managers. New York: McGraw-Hill/Irwin.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E 2015. Financial & managerial accounting. John Wiley & Sons.

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