a. Determine how many direct labour hours would be required each month to fill the Glasgow Industries order.
b. Prepare an analysis showing the impact on profit of accepting the Glasgow Industries order.
c. Calculate the minimum unit price that Grandmaster could accept for the Glasgow Industries order without reducing net profit.
d. Identify the factors, other than price, that Grandmaster’s management should consider before accepting The Glasgow Industries order.
Introduction
Overheads are the costs that are incurred indirectly by the manufacturing department. These costs are all the manufacturing costs that are not direct labor or material expenses. The actual overheads are the overhead costs that have been incurred indirectly during the manufacturing process. These include utility expenses like water, electricity and gas. (Maher, Lanen and Rahan, 2005) The others are rent, repairs and maintenance expenses, depreciation, salaries for production staff and many more related expenses. Applied overhead are the indirect manufacturing expenses that are assigned to the manufactured goods. The assignment of manufacturing costs is done using a predetermined formula to arrive at the rate chargeable per labor or machine hour that becomes the standard hourly rate for the production department. For instance if the company intends to spend a total of $100,000 in a financial year and also consume over 1000 hours of labor hours, then the company will calculate the predetermined annual rate of overhead as $100 per hour. (Hermanson, Edwards & Invacevich, 2011) However due fluctuations and variances in the production standards, these rates usually vary with the actual production rates. (Garrison, Noreen and Brewer, 2009)
| a) labour hours per month = $6 per unit = 30000/6 = 5000 | |||
| additional labor hours = 12000/6 = 2000 | |||
| Total hours required per month = 5000 +2000 = | |||
| 7000 hrs |
(Khan, 1993
b) Profit Analysis on the Glasgow Order.
| Price per unit | 27 | 28 | 27 | 28 |
| Variable overhead | 6 | 6 | 6 | 6 |
| Fixed manu O/H (Traceable) | 8 | 8 | 8 | 8 |
| Fixed Manu O/H (allocated) | 4 | 4 | 4 | 4 |
| Applied Manu O/H rate | 18 | 18 | 18 | 18 |
| Freight Exp | 1 | 1 | 1 | 1 |
| Additional costs (12000/30000) | 0 | 0 | 0.4 | 0.4 |
| Profit (40%) | 26.6 | 26.6 | 26.76 | 26.76 |
| Contribution margin per unit | 21 | 22 | 21 | 22 |
| Breakeven units | 0.619047619 | 0.619048 | 0.92381 | 0.881818 |
| Breakeven sales in dollars | 18571.42857 | 18571.43 | 27714.29 | 26454.55 |
(Vance, 2003)
c)
| Cost per unit 27 * 30000 units | 810000 | 27.16 | 814800 |
| Total costs 19 * 30000 | 570000 | ||
| Additional fixed cost | 12,000 | ||
| Total costs | 582,000 | 19.4 | 582000 |
| Profit | 228,000 | 232800 | |
| Percentage profit | 39.17525773 | 40 |
The minimum price that Grandmaster should accept is $27.16 that will guarantee a profit of 40% on the total cost of production.
d) The following factors should be considered by Grandmaster before accepting the order from Glasgow.
The order from Glasgow is almost similar to their own orders. The major difference would arise on the terms of deliverance and if there are any fines or penalties that might arise on any late deliveries. The cases of substandard quality and the way it should be handled should also be discussed. (Drucker, 1999)
Grandmaster should also discuss the effects of a possible cancellation in the event that the contract is cancelled and they have already made contracts with the concerned casual laborers for the work or if they have ordered extra materials for the work and they are already incurring extra storage charges. (Horngren, Datar and Foster, 2003)
Grandmaster should also produce a sample product that should be approved by Glasgow as well as the client that has ordered the products from Glasgow. It would be disastrous to manufacture the first lot of products that is against or below the standards or requirements of the client’s specifications.
Finally to conclude, the order from Glasgow should have a least one representative from Glasgow that will oversee the production process and ensure that the products are manufactured to the standards of their client.
References
Drucker, F. (1999) Management Challenges of the 21st Century. New York: Harper Business,
Garrison, H., Noreen, E., Brewer, C. (2009) Managerial Accounting. McGraw-Hill Irwin. 2009.
Hermanson, R.H., Edwards, J.D., & Invacevich, S.D. (2011). Accounting Principles: A Business Perspective. First Global Text Edition, Volume 2 Managerial Accounting, 37-73.
Horngren, Datar and Foster (2003) Cost Accounting – A Managerial Emphasis, 11th edition Prentice Hall
Khan, M. (1993) Theory & Problems in Financial Management. Boston: McGraw Hill
Higher Education.
Maher, Lanen and Rahan (2005) Fundamentals of Cost Accounting, 1st Edition (McGraw-Hill
Vance, D. (2003) Financial analysis and decision making: tools and techniques to solve
financial problems and make effective business decisions. New York: McGraw-Hill.
