a case studyMichael Benedicto

Ron CajayonShirley Marie Ferrer

Kenneth Yumang

Agenda

Company overview

Characters in the case

Areas of Consideration

Statement of the Problem

Possible Solutions

Conclusion / Recommendation

Company Overview

Contact Global

Premier producer of Global Positioning System (GPS) Devices. Recently hired a new CEO to pave its way on a better product quality and promote stronger business structure.

Characters

Contact GlobalCEO – Guochang LiCompany Managers

Not Guochang Li’s real picture

Not the managers’ real picture

Areas of Consideration

CEO’s Priorities- Restore employee morale- Prepare a sensible annual budget

Basic Budget Data

Absorption Income Statement

BOD $2M Profit Goal

$10-25k Bonuses for top managers

Areas of Considerations

Basic Budget Data

Areas of Considerations

Absorption Income Statement

Statement of the Problem

1. Assuming that the company does not build up its inventory (i.e. P = S) and its selling price and cost structure remain the same, how many units of the GPS device would have to be sold to meet the net operating income of $2,000,000.00?

Possible Solution/s

Possible Solution/s

Consider the variable column first; total cost per unit of $77.20

Then get the no. of units to be sold with the desired NI of $2,000,000.00

Statement of the Problem

2. Verify your answer to (1) above by constructing a revised budget and budgeted absorption costing income statement that yields a net operating income of $2,000,000?

Possible Solution/s

Possible Solution/s

Get the total product cost per unit first considering the FOH of 410,000 units

Then substitute it as the production cost on our absorption income statement. The same target NI will be its result.

Statement of the Problem

3. Unfortunately, by October of the next year it had become clear that the company would not be able to make it the $2,000,000 target profit. In fact, it looked like the company would wind up the year as originally planned, with sales of 400,000 units, no ending inventories, and a profit of $1,672,000.00.

Several managers who were reluctant to lose their year-end bonuses approached Guochang and suggested that the company could still show a profit of $2,000,000. the managers pointed out that at the present rate of sales, there was enough capacity to produce tens of thousands of additional GPS devices for the warehouse and thereby shift fixed manufacturing overhead costs to another year. If sales are 400,000 units for the year and selling price and cost structure remain the same, how many units would have to be produced in order to show a profit of at least $2,000,000 under absorption costing?

Possible Solution/sThe situation will picture a sales of $48,000,000 (400,000 units @ $120). From this sales, a $2,000,000 profit will be generated by a method of working back or squeezing can be utilized to determine how many units must be produced to shift a part of the fixed overhead to the next period.

Starting from the Net Income, we know that fixed selling and administrative expense does not change even if there is a change in production level, while variable selling and administrative expense is based on the actual unit sold in a period. Therefore, by working back, we can add these expenses to the Net Income to arrive at a Gross Profit as follows:

Possible Solution/sWe know that Sales less Cost of Sales is Gross Profit. But in this case, we do not know our cost of sales yet because we are still looking for its component. However, since we already have the sales and gross profit figures, we can determine the cost of sales.

Cost of Sales is the cost of actual units sold. Therefore, cost of sales divided by the units sold is the cost per unit.

Possible Solution/s

From the given data on cost per unit, the fixed manufacturing overhead can be computed.

Total fixed overhead of $6,888,000 is already given in the problem. Since the fixed overhead per unit was determined already, the total units shared on the total fixed overhead can be computed as follows:

Possible Solution/s

Production and Ending Inventory can now be computed using Total Units Produced and Cost/Unit

Statement of the Problem

4. Verify your answer to (3) above by constructing an absorption costing income statement.

Possible Solution/s

Conclusion / Recommendation

Thank you