### QUESTION

**“Congratulations!”**

You have been promoted to the CFO position at IPS! You have hardly settled into your new office when the CEO asks you to prepare a financial report on the proposed Android01, as well as the MiniX and MiniY.

$2M has already been spent on market research, and IPS wishes to determine if the new Android01 component be produced in a way that will yield a profit.

“As you know,” the CEO says, “there are different ways of allocating fixed overhead costs and our choice will affect the cost-per-unit of Android01.” He continues, “I hope you can help us understand the different choices and how they’ll impact our business.”

Your prior manufacturing experience makes you think that examining an alternative method of assigning costs would also be prudent since Android01 shares component assembly with a related product — Processor01.

In your conversation with the IPS production manager, he alludes to the fact that a 30 percent markup is standard at IPS. While you’re at it, you look for information on the variable costs per unit for different levels of production so you can provide a recommendation on what level of output will maximize profit.

Thinking you’ve got everything covered, you decide to take a break. Just as your lunch arrives, you get a call from your CEO: “I almost forgot to ask you about the Mini line!”

The CEO continues, “The new MiniY product has been so successful that we would like to increase production. We will need a budget projection. Also, the shared production costs for the Mini line have affected the value of our premiere product, the MiniX — I would like you to provide me with a profit or loss figure for the MiniX as well.

As you scramble to take notes, she continues: “I’ll need a report summarizing your findings and projections.”

This project will require you to analyze operations costs for the organization using managerial finance techniques. You will next determine the level of production and prices that maximize the firm’s profit. Finally, you will prepare a financial budget for the firm and present your recommendations.

Begin by going to Step 1: Allocation of Costs.

**Step 1: Allocate Costs**

You have been asked to look at production options for the Android01 since production methods and allocation of costs have implications for cost-per-unit. There are two alternative methods of production being considered. Begin by gathering data (using financial information in decision making), then answer various questions to determine the suitability of the project.

**Production A**

Costs are as follows:

- $4.5 million per year in rent for factory and machinery
- components and labor in the amount of $12 million will produce 300 units per year

**Production B**

In an alternative production method, the production of Android01 will share some production facilities and service divisions with Processor01. Fixed costs are $5 million per year, and are to be assigned at the rate of 30 percent to Android01 and 70 percent to Processor01.

The variable cost of the production facilities and service divisions is $20 million per year. The square footage of factory space and labor needed for the production of 500 units of Processor01 and 300 units of Android01 are listed below.

** **

**Sq. Ft.**

**Labor**

Processor01 (500 units)

70,000

120

Android01 (300 units)

30,000

80

The remaining cost for the production of Android01 is for components, at $25,000 per unit.

**Question 1:** In Method B, what would be the cost-per-unit of producing Android01 using factory space as the allocation basis? What would be the cost-per-unit using labor as the allocation basis?

Before starting on your calculations, review materials on production cost allocation.

Submit your Allocation of Costs Report and Calculations to the dropbox below. Submit a spreadsheet showing your calculations in Excel and provide a narrative analysis in Word. Please note that “narrative” in this Project does not mean audio, it rather means a presentation of the results of your analysis using words and the important numbers. Your narrative analysis should summarize the results of your analysis and make recommendations for the benefit of company.

Before you submit your assignment, review the competencies below, which your instructor will use to evaluate your work. A good practice would be to use each competency as a self-check to confirm you have incorporated all of them in your work.

- 3.1 Identify numerical or mathematical information that is relevant in a problem or situation.
- 3.2 Employ mathematical or statistical operations and data analysis techniques to arrive at a correct or optimal solution.
- 3.3 Analyze mathematical or statistical information, or the results of quantitative inquiry and manipulation of data.
- 3.4 Employ software applications and analytic tools to analyze, visualize, and present data to inform decision-making.
- 10.5 Develop operating forecasts and budgets and apply managerial accounting techniques to support strategic decisions.

Step 2: Activity-Based Costing

An alternate method of assigning costs is activity-based costing. The major activity for the production of both Processor01 and Android01 is component assembly. There will be a total of 125,000 assemblies per year for the production of 500 units of Processor01 and 300 units of Android01 at a total cost of $25 million. Each unit of Android01 will require 180 assemblies. The remaining cost for the production of Android01 is for components, at $25,000 per unit.

Review:

Section 4.1, Activity-Based Costing and Management and Section 4.2, Activity Based-Costing Method

Question 2: What would be the cost per unit of producing Android01 using activity-based costing?

Submit your Activity-Based Costing Report and Calculations to the dropbox below. Submit a spreadsheet showing your calculations in Excel and provide a narrative analysis in Word. Your narrative analysis should summarize the results of your analysis and make recommendations for the benefit of company.

Before you submit your assignment, review the competencies below, which your instructor will use to evaluate your work. A good practice would be to use each competency as a self-check to confirm you have incorporated all of them in your work.

•3.1 Identify numerical or mathematical information that is relevant in a problem or situation.

•3.2 Employ mathematical or statistical operations and data analysis techniques to arrive at a correct or optimal solution.

•3.3 Analyze mathematical or statistical information, or the results of quantitative inquiry and manipulation of data.

•3.4 Employ software applications and analytic tools to analyze, visualize, and present data to inform decision-making.

•10.5 Develope operating forecasts and budgets and apply managerial accounting techniques to support strategic decisions.

**Step 3: Markup Pricing**

Suppose IPS uses markup pricing for Android01. Fixed costs are $4.5 million, and for a level of production of 300 units, the variable cost-per-unit is $48,000.

**Question 3: **What is the price of the Android01 at 30 percent markup over full cost?

Submit your Markup Pricing Report and Calculations to the dropbox below. Submit a spreadsheet showing your calculations in Excel and provide a narrative analysis in Word. Your narrative analysis should summarize the results of your analysis and make recommendations for the benefit of company.

Before you submit your assignment, review the competencies below, which your instructor will use to evaluate your work. A good practice would be to use each competency as a self-check to confirm you have incorporated all of them in your work.

- 3.1 Identify numerical or mathematical information that is relevant in a problem or situation.
- 3.2 Employ mathematical or statistical operations and data analysis techniques to arrive at a correct or optimal solution.
- 3.3 Analyze mathematical or statistical information, or the results of quantitative inquiry and manipulation of data.
- 3.4 Employ software applications and analytic tools to analyze, visualize, and present data to inform decision-making.
- 10.5 Develop operating forecasts and budgets and apply managerial accounting techniques to support strategic decisions.

**Step 4: Choose the Profit-Maximizing Output Level**

The CEO’s next question is, “What level of output would be required to maximize our profit on the Android01?” You have calculated the variable cost-per-unit for different levels of production. From market research, you have a schedule of prices for these levels. The information is summarized in the table below:

**Number of Units**

**Variable Cost-per-Unit ($)**

**Sale Price-per-Unit ($)**

200

60,000

70,000

250

54,000

66,000

300

48,000

64,000

350

46,000

59,000

400

45,000

52,000

A recommendation on output could affect everyone in the company, from management to sales, to the floor manager and assembly line workers! You don’t want to get this one wrong so you take some extra time to proof your calculations.

**Question 4: **Based on profit-maximization analysis, what level of output should you recommend to the CEO?

Before starting your calculations, review materials on profit maximization output.

Submit your Profit-Maximization Output Report and Calculations to the dropbox below. Submit a spreadsheet showing your calculations in Excel and provide a narrative analysis in Word. Your narrative analysis should summarize the results of your analysis and make recommendations for the benefit of the company.

- 3.1 Identify numerical or mathematical information that is relevant in a problem or situation.
- 3.2 Employ mathematical or statistical operations and data analysis techniques to arrive at a correct or optimal solution.
- 3.3 Analyze mathematical or statistical information, or the results of quantitative inquiry and manipulation of data.
- 3.4 Employ software applications and analytic tools to analyze, visualize, and present data to inform decision-making.
- 10.5 Develop operating forecasts and budgets and apply managerial accounting techniques to support strategic decisions.

**Step 5: Budget**

Your CEO has asked you to prepare a production cost budget for the MiniY for May 20X8. The actual costs in April 20X8 were:

**MiniY: Production Cost Budget**

April 20X8

Production–Units of MiniY

3,000

Components cost (variable)

24,000,000

Labor cost (variable)

13,500,000

Rent (fixed)

6,000,000

Depreciation (fixed)

6,000,000

Other (fixed)

2,000,000

**Total**

**$51,500,000**

For the month of May, the number of MiniY produced will increase to 3,200, reflecting an anticipated sales increase related to a new marketing campaign.

**Question 5: **Using the above information, prepare a budget for May 20X8 stating the total cost. Use a spreadsheet to display your data and calculations.

Before starting your calculations, review materials on integrating accounting and financial information.

Submit your Production Cost Budget Report and Calculations to the dropbox below. Submit a spreadsheet showing your calculations in Excel and provide a narrative analysis in Word. Your narrative analysis should summarize the results of your analysis and make recommendations for the benefit of company.

- 3.1 Identify numerical or mathematical information that is relevant in a problem or situation.

**Step 6: Profit or Loss**

IPS operates a factory which produces the MiniY and the MiniX. During September 20X8, the factory produced 3200 units of MiniY and 3000 units of MiniX. The joint cost related to the operation was $3,000,000. MiniX sells for $27,100 per unit and MiniY sells for $25,000 per unit. Allocate the joint costs using the relative sales values of MiniY and MiniX.

**Question 6: **With the costs that you calculate, what is the profit or loss associated with MiniY?**NOTE:** Assume that the variable and fixed costs mentioned in Step 5 are also applicable to Step 6 when calculating the profit or loss for MiniY

Before starting your calculations, review the materials on integrating accounting and financial information.

Submit your Profit or Loss Report and Calculations to the dropbox below. Submit a spreadsheet showing your calculations in Excel and provide a narrative analysis in Word. Your narrative analysis should summarize the results of your analysis and make recommendations for the benefit of the company.

- 3.1 Identify numerical or mathematical information that is relevant in a problem or situation.

**Step 7: Managerial Accounting Report to Management**

Although you get frustrated at times with your CEO’s constant requests for information, it is your job as a CFO to analyze that data for her. You both understand that data provides a basis for sound operational decision-making (integrating accounting and financial information). The CEO’s final request is for an analysis and summary of financial projections for the Mini and Android lines, based on the information gathered in the previous steps.

You collect your previous reports and spreadsheets and pore over them, looking for meaningful trends and patterns.

Submit your Managerial Accounting Report to Management in the dropbox below

- 3.1 Identify numerical or mathematical information that is relevant in a problem or situation.

Individual Feedback From Prfessor:

This refers to the document posted referring to cost allocation project3MBA.doc.:

Per the previously posted announcement: Please submit a spreadsheet that presents your analysis of the numbers in each step for the project. Embed your comments in the spreadsheet and not as a separate document. The comments should speak to the questions identified in each step and be in your own words.

You do not need to reproduce the project materials

**Step 2**

The number is correct for the produce cost using ABC, but the commentary embedded in the spreadsheet needs to be enhanced.

ABC is an alternative to allocating costs to a cost object (the Android) versus traditional methods seen in Step 1. ABC does not directly reduce total costs – if the Android is assigned fewer costs that means other products will be assigned more. So, the real question is, does ABC result in a more accurate allocation of costs so that we have a more precise idea of what it costs to make an Android?

The idea of ABC is to assign the costs first to activities and then to products on the basis of each product’s consumption of these activities. In this case, and as your numbers reflect, the total cost of 125,000 assemblies is given. We can then compute the cost of an assembly. Then we can determine how much of the costs are consumed by the Android on the basis of the number of assemblies the Android requires (also given in the problem).

In many cases, ABC yields more accurate cost data than traditional methods when there are multiple heterogeneous products being made. If the Process product is significantly different in nature in comparison to the Android, ABC will likely provide better cost information.

In a later question, “cost plus” pricing is considered. If the costs are incorrect the price will not be appropriate – either inappropriately too low or too high.

ABC also offers an advantage over traditional methods in that it helps identify areas where costs can be reduced. For example, if assemblies drives costs and the Android requires 180 separate assemblies, a product redesign that requires fewer assemblies would drive down the cost of an Android.

**Step 3**

Again, the number for the price of an Android based on mark-up costing, but the comments are insufficient.

As you have seen in steps 1 and 2 there are different methods of computing the cost of a product (for the indirect costs that must be allocated). When coupled with cost plus pricing, however, problems can ensue. As you may have realized, the resulting price might be too low or too high. Too low means the company misses a chance to make additional profit, too high may result in lost sales. That being said, for products that are differentiated buyers may not be able to make a clear determination as to value. So, blind allegiance to a pricing policy may not optimize prices.

What are the benefits of using markup costing? What are the hazards? This should be part of your discussion.

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