Essay On Accounting Returns
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On the normal orders, the margin from the sale of a single bracelet is $125.95. On the order for the special bracelets, the costs are different due to the need of additional materials and special machines. The direct materials will cost the company $149. The direct labor and manufacturing overhead is constant. Therefore, the unit product cost per bracelet is $270. In addition to the direct materials, the requirement for the special engraving machine will increase the unit cost of the product by $46.5.
Therefore, the total unit product cost will be $316.50. If the jeweler accepts the order for the price, stated he will still breakeven. Breakeven point is price level when the production costs are less than the total revenues. The company ought to accept the order at the price given that the special tool can later be disposed for a gain.
The company will recover the invested amount in the machine after seven years six months. The intangible benefits will be reaped throughout the production period. The requirement that the required rate of return be 15 percent and above means that the return per year from the machine has to be $112,500. Since the company is saving $100,000 per year, the value of the intangible benefits has to be at least $12,500.
Month Produced quantity Preceding month inventory (10%) Current month inventory
July 31500 3000 4500
August 47500 4500 6000
September 59000 6000 5000
October 45000 5000
At the end of each month, there must be inventory that will account for ten percent of the next month’s product sales. Since inventory is a source of costs for the company, it is not the desire of the management to keep the level higher than the required amounts. Therefore, each month, the company has to produce the amount that will meet the projected sales after adding the last month’s previous inventory. Therefore, there is no piece of inventory that is held by the company without having to deal with the issue of shortage as well as slack.
Manufacturing overhead budget
Direct cost 1400001
Total fixed overheads 200000
First quarter $
4800* 1.75 8400
Total variable costs 35700
Total manufacturing overheads 235700
35000*4 = 140000
15000*4 = 60000
Manufacturing overhead rate refers to the proportion of the manufacturing overheads that is attributable to the given cost driver such as the units or direct labor hours. The manufacturing overhead cost for the company can be arrived at by dividing the total manufacturing overhead costs for the year by the cost driver (labor hours).
235700/ (5000 + 4800 + 5200 + 5400)
The manufacturing overhead rate for the company is $11.55 per direct labor hour.
The budget contains two components. There are fixed components in the budget. The fixed component does not vary with the rate of business activity. The fixed components entail the aspects that will be set per period. The variable components in the budget indicate variations that depend on the rate of business activity (Schneider & Sollenberger, 2006). The difference in the sales by 1000 units led to the increment in the net income for the month by $1100. The following are the activity variances.
Wages and salaries ($6400+ $0.25)1000= 6650 variance 250
Utilities ($2100 + $0.50)1000 = 2600 variance 500
Miscellaneous ($700 + $0.10) 1000 = 800 variance 100
Raw materials ($2.3 * 1000) = 2300
The company ought to focus ore on the variances that can be reduced but still provide the additional units of output. The miscellaneous variances ought to be reduced since they are the ones that offer the company the highest variability. The difference in raw materials demanded with the increment in the quantity demanded for the food can be justified since this is a direct material. The utilities can increase in order to produce the additional quantity since they are required to produce the food. They also make up the direct material requirement. Therefore, the miscellaneous costs ought to be reduced.
Required rate of return
Operating income- minimum return
Residual income for the company is 48,000
Return on investment refers to the gains that are attained from making of a certain financial sacrifice (Schneider & Sollenberger, 2006). The return on investment can be calculated by dividing the total profits with the investment (cost of assets that have been employed in generating the profit ).
$800000 / $3200000
8000000 * 2.5
Increases in the net operating income
400,000 * 5.0
Return on investment
2,000,000 / 3,200,000
The new return on investment will be
In the more realistic scenario, the total investment in assets will be 4,000,000. The total profit in the more realistic scenario will be 2,800,000. . In this case, the return on investment will be arrived at by dividing the 2,800,000 / 4,000,000. The realistic return on investment will be 0.7.