Professional Documents
Culture Documents
Krishnan -FT13247 Prashant Mishra -FT13259 Rohit Sharma -FT13271 Tilak Shrivastava -FT13283
Hanson: 1. If the company had dropped Product 103 as of January 1, 1974, what effect would that action has had on the $ 160,000 profit for the first six months of 1974? The expense and the revenue is to be calculated for finding the effect of droppi ng the product from the product portfolio. . Expense = Saving due to dropping the product 103 . Revenue = Opportunity Cost of dropping product 103 . Total saving = Expense Revenue Expenses & Revenue with and without Product 103 EXHIBIT -4 Direct Labor 698000 Power 31000 Materials 492000 Supplies 36000 Repairs 10000 Comp Insurance (5% of DL) 34900 Total Expense 1301900 1301900 Revenue due to product 103 2710000 Total Saving -1408100 Profit producing product 103 160000 Profit without producing product 103 -1248100 Two points which we can infer from the above findings are . There would be a loss of $1408100if they drop thisproduct. . The company would make a loss of $1248100instead of a profit of $160000.
2. In January 1975, should the company have reduced the price of product 101 from $4.90 to $4.50? . The decision to reduce the price of product 101 has to be taken based on its eff ect . . Per unit variable cost can be found as follows: Variable Cost per unit Standard Actual FROM EXHIBIT -4 Direct Labor 1.2126 1.2126 Power 0.021 0.021 Materials 0.717 0.68115 Supplies 0.049 0.04655 Repairs 0.0166 0.0166 Comp Insurance (5% of DL) 0.06063 0.06063 Variable Cost per unit Variable Cost per unit 2.03853 Scenarios of holding and reducing the price Held at $4.9 Reduced to $4.5 Unit variable cost 2.03853 2.03853 Price per unit 4.9 4.5 Units to be sold 750000 1000000 Discount to be given 0.05292 0.0486 Unit expense 2.80855 2.41287 Total Expense 2106412.5 2412870 Savings due to reducing 306457.5 Since the saving is around $306457.5 due to reduction of price, the company shou ld go ahead reducing the price of the product.
3. Which product is the most profitable? Contribution margin and volume defines the profitability. . Calculate and compare the contribution margin for each product Headings Product 101 Product 102 Product 103 Price 4.9 5.15 5.5 Discount to be given 0.10878 0.05562 0.0946 Actual Price 4.79122 5.09438 5.4054 Direct Labor 1.2126 1.1844 1.393 Power 0.021 0.0484 0.061 Materials 0.717 0.9152 0.9824 Supplies 0.049 0.0924 0.071 Repairs 0.0166 0.029 0.0206 Comp Insurance (5% of direct labor) 0.06063 0.05922 0.06965 Total Expense 2.07683 2.32862 2.59765 From the above table we see that Product 103 seems to be the most profitable for Hanson manufacturing company.
4. What has caused the company to turn around? The Hanson Company lost $103,854 in the year 1973 and made a profit of $160,000i n Jan to June 1974. The reasons for the turnaround are . Cost Allocation Standardsused were inaccurate Actual costs were lower than the standard costs which imply that allocation stan dards are not up-to-date. This reduction in actual costs could be due to technological advancements and process improvements. But this would not have reflected earlier because allo cation standards by dates. . Increased Depreciation cost addition Extra depreciation cost of $129,000 is included in the total standard cost, but it is excluded in the total actual cost. This is one of the major factors for a swing from loss of $129,000 according to standard costing and a profit of $160,000 according to the actual numbers. . Fixed cost divided on number of units Fixed cost as such should be not be divided by the number of units. In Hanson manufacturing company, fixed costs (depreciation, etc.) are allocated according to the number of units manufactured. . Increased sale of products Unit Sales of products has increased which has also contributed to the turnaroun d from 1973 to 1974. . Depreciation allocated according to the units of products The depreciation cost are allocated according to the product and number of units produced in the each product category ($528,000 for product 101, $592,000 for pr oduct 102 and $371,000 for product 101). This will lead to erroneous conclusions as fixed costs should not be allocated according to number of units.