Case 1: Coffee Bean Ltd. (CBL) is currently managing two projects which process and distribute two blends of coffee: Tropicana coffee project and Tarime coffee project. The company buys coffee beans from around the world and roasts, blends, and packages them for resale. CBL currently has 40 different coffees that it sells to gourmet shops in one-pound bags. The major cost of the coffee is raw materials. However, the company's predominantly automated roasting, blending, and packing process requires a substantial amount of manufacturing overhead. The company uses relatively little direct labour. Some of CBL's coffees are very popular and sell in large volumes, while a few of the newer blends have very low volumes. CBL prices its coffee at manufacturing cost plus a mark-up of 30%. If CBL's prices for certain coffees are significantly higher than market, adjustments are made to bring CBL's prices more into alignment with the market since customers are somewhat price conscious. For the coming year, CBL's budget includes estimated manufacturing overhead cost of ?3,000,000. CBL assigns manufacturing overhead to products on the basis of direct labour-hours. The expected direct labour cost totals ?600,000, which represents 50,000 hours of direct labour time. Based on the sales budget and expected raw materials costs, the company will purchase and use ?6,000,000 of raw materials (mostly coffee beans) during the year. The expected costs for direct materials and direct labour for one-pound bags of two of the company's coffee projects appear below. Tropicana coffee Tarime coffee Direct materials ?4.20 ?3.20 Direct labour (0.025 hours per bag) ?0.30 ?0.30 CBL's controller believes that the company's traditional costing system may be providing misleading cost information. To determine whether or not this is correct, the controller has prepared an analysis of the year's expected manufacturing overhead costs, as shown in the following table: Activity cost pool Activity measure Expected activity for year Expected cost for the year Purchasing Purchase orders 1,710 orders ?513,000 Material handling Number of setups 1,800 setups ?720,000 Quality control Number of batches 600 batches ?144,000 Roasting Roasting hours 90,100 hours ?961,000 Blending Blending hours 33,500 hours ?402,000 packaging Packaging hours 25,000 hours ?206,000 Total manufacturing overhead cost ?3,000,000 Data regarding the expected production of Tropicana and Tarime coffee projects are presented below. Tropicana project Tarime project Expected sales ?100,000 ?2,000 Batch size 3 per batch 3 per batch Setups ?10,000 ?500 Purchases order size ?20,000 ?500 Roasting time per ?100 1 hour 1 hour Blending time per ?100 0.5 hour 0.5 hour Packaging time per ?100 0.1 hour 0.1 hour REQUIRED: 1. Using direct labour-hours as the base for assigning manufacturing overhead cost to products, do the following: a) Determine the predetermined overhead rate that will be used during the year. b) Determine the unit product cost of one pound of the Tropicana coffee and one pound of the Tarime coffee. 2. Using activity-based costing as the basis for assigning manufacturing overhead cost to products, do the following: a) Determine the total amount of manufacturing overhead cost assigned to the Tropicana coffee and to the Tarime coffee for the year. b) Using the data developed in (2a) above, compute the amount of manufacturing overhead cost per pound of the Tropicana coffee and the Tarime coffee. Round all computations to the nearest whole centre. c) Determine the unit product cost of one pound of the Tropicana coffee and one pound of the Tarime coffee. 3. Write a brief memo to the president of CBL explaining what you have found in (1) and (2) above and discussing the implications to the company of using direct labour as the base for assigning manufacturing overhead cost to products. Case 2: Cyprus Fuel Project manufactures and sells a single product, EcoPlus, a fuel saving device for motor vehicles in the domestic market. The Project commenced business operations on January 2010 and sales in the first six months were brisk due to the world wide increase in fuel prices. However the second half the year saw a drop in sales as a result of more competing companies entering the market and a gradual reduction in fuel prices. The following summarised profit and loss account has been prepared by the previous management accountant: YEAR 2010 1st half year 2nd half year Sales 1st half: 35,000 units ?1,400,000 2nd half: 25,000 units ?1,000,000 Direct material ?350,000 ?250,000 Direct labour ?280,000 ?200,000 Manufacturing overhead ?245,000 ?195,000 Administration overheads ?15,000 ?15,000 Selling overheads ?165,000 ?1,055,000 ?145,000 ?805,000 Net profit ?345,000 ?195,000 * Selling overheads include sales commission of 5% based on sales value. The Project Manager (PM), an engineer who founded the Project, recently attended a seminar at UEL for non-accountants on ?Cost-Volume-Profit Analysis and its benefits?. Although he found the seminar interesting, he would like to know more about the following: (a) How does the economist?s breakeven chart differ from the accountant?s breakeven chart? (b) The term ?fixed cost? has been explained in the seminar as ?a cost that remains unchanged when production activity changes over a period of time and over a certain relevant range?. He is unsure of what is meant by ?period of time? and ?relevant range? as he believes that there?s no such thing as a fixed cost and that all costs are variable in the long term. (c) An explanation of the breakeven point and margin of safety of the Project based on its present cost structure for the 2nd half year of 2010, and a brief explanation of the High-Low method of cost estimation used in your calculations, including its weaknesses as well as suggesting an alternative method. The marketing manager feels that the current marketing strategy used by the Project is no longer effective. The Project presently employs a large sales staff on a 3 monthly contractual basis and are paid a basic salary together with a sales commission. The sales staff needs to fulfil the monthly sales quota set by the Project for their contract to be renewed further. The marketing manager has suggested the following proposals to stop the decline in sales for the next six months: Proposal 1 Rent floor space in busy shopping malls located in other major cities not served by the current sales staff and set up booths using the rented space to promote and sell the Project?s product. Some of the existing sales staff will be seconded to manage these booths. Spend an extra ?38,000 on advertising and promotional materials. Rental of floor space would amount to ?72,000. The marketing manager is confident that together with a 5% reduction in unit selling price, sales volume will increase by 30% over the 2nd half year sales of 2010. Unit material cost will be reduced by 5% due to bulk discount. It is assumed that all other costs remain unchanged. Proposal 2 Reduce the present number of sales staff by not renewing the contracts of those who failed to fulfil the sales quota set by the Project. Appoint workshops/garages (motor vehicle repair shops) and shops selling car accessories to be the Project?s authorised dealers. Additional promotional materials (posters, leaflets etc.) for the authorised dealers would cost ?15,000. Fixed selling overheads (i.e. salaries of sales staff) will be reduced by ?75,000. The marketing manager is confident that with a 10% reduction in unit selling price and a sales commission of 18% of selling price to be paid to all authorised dealers and remaining sales staff, the sales volume will increase by 15% over the 2nd half year of 2010 sales. Unit material cost will be reduced by 3%. It is assumed that all other costs will remain unchanged. REQUIREMENT: You are required to write a report to the Project Manager discussing the points raised by him and to evaluate the two proposals put forward by the marketing manager. Your report should include: 1. A discussion on the three points raised by the managing director. 2. A breakeven graph and profit-volume graph for each proposal indicating the breakeven points and margin of safety. Verify your answers by calculations. All graphs are to be drawn and computations be made using MS Excel spreadsheet. 3. A comparison between the two proposals clearly stating any assumptions made. 4. A recommendation to the managing director on which proposal to accept.,hello sir, when can i expect the answer from your side.,Hello sir, when can i expect the answer from you..
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