project 3

“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.
When you submit your project, your work will be evaluated using the competencies listed below. You can use the list below to self-check your work before submission.
10.5 Develop operating forecasts and budgets and apply managerial accounting techniques to support strategic decisions.
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.LaborProcessor01 (500 units)70,000120Android01 (300 units)30,00080
The remaining cost for the production of Android01 is for components, at $25,000 per unit.
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. Be sure to show your calculations in Excel and provide a narrative analysis in PowerPoint. Your narrative analysis should summarize the results of your analysis and make recommendations for the benefit of company.
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.
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. Be sure to show your calculations in Excel and provide a narrative analysis in PowerPoint. Your narrative analysis should summarize the results of your analysis and make recommendations for the benefit of company.
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 $48,000.
What is the price of the Android01 at 30 percent markup over full cost?
Submit your Markup Pricing Report and Calculations to the dropbox below. Be sure to show your calculations in PowerPoint and in an Excel spreadsheet. Be sure to show your calculations in Excel and provide a narrative analysis in PowerPoint. Your narrative analysis should summarize the results of your analysis and make recommendations for the benefit of company.
Step 4: Choose the Profit-Maximizing Output Level
The CEO’s next question is, “What level of output would be required to maximize our profit on the Android01?” You have calculated the variable cost-per-unit for different levels of production. From market research, you have a schedule of prices for these levels. The information is summarized in the table below:
Number of UnitsVariable Cost-per-Unit ($)Sale Price-per-Unit ($)
70,000
54,000
66,000
64,000
46,000
59,000
400
45,000
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. Be sure to show your calculations in Excel and provide a narrative analysis in PowerPoint. Your narrative analysis should summarize the results of your analysis and make recommendations for the benefit of the company.
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 BudgetApril 20X8Production–Units of MiniY3,000Components cost (variable)24,000,000Labor cost (variable)13,500,000Rent (fixed) 6,000,000Depreciation (fixed)6,000,000Other (fixed)2,000,000
$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.
integrating accounting and financial information
Submit your Production Cost Budget Report and Calculations to the dropbox below. Be sure to show your calculations in Excel and provide a narrative analysis in PowerPoint. Your narrative analysis should summarize the results of your analysis and make recommendations for the benefit of company.
Step 6: Profit or Loss
IPS operates a factory which produces the MiniY and the MiniX. During September 20X8, the factory produced 500 units of MiniY and 600 units of MiniX. The joint cost related to the operation was $3,000,000. MiniX sells for $3,500 per unit and MiniY sells for $3,800 per unit. Allocate the joint costs (
) using the relative sales values of MiniY and MiniX. You hope you can prove that the MiniX is profitable, but you also recognize that numbers don’t lie!
Question 6:
With the costs that you calculate, what is the profit or loss associated with MiniX?
Before starting your calculations, review the materials on
Submit your Profit or Loss Report and Calculations to the dropbox below. Be sure to show your calculations in Excel and provide a narrative analysis in PowerPoint. Your narrative analysis should summarize the results of your analysis and make recommendations for the benefit of the company.
Step 7: Present Financial Projections
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 (
). 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 Presentation of Financial Projections in the dropbox below. Your summary should be submitted as a PowerPoint presentation.
10.5 Develop operating forecasts and budgets and apply managerial accounting techniques to support strategic decisions.







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