Pecos printers financial operations - Finance Essay Example

Question 1

Contribution per unit at the price set by Paul Pecos:

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Selling Price                           $300

Direct Materials                     $125

Direct Labor                             $50

Variable Overheads                 $30

Contribution                             $95

As we can see from the contribution per unit calculation performed above, lower selling prices of the product can be accepted, because a positive contribution will still be attained.  We also have to keep in mind that fixed costs will not be affected for up to a production of 20,000 units.  Therefore management should try to reach sales of 20,000 units from orders that provide a positive contribution in order to diminish idle capacity and enhance profitability.

Question 2

Contribution per unit                         $95

Fixed Cost per unit                            $45

Margin of Safety                               $50

Minimum price set by Paul Pecos      $300

Margin of Safety                               $  50

Actual minimum selling price            $250

The reaction of Paul to Ms. Goodperson’s sale was wrong in view that his decision was not in the financial performance best interest.  In addition he demoralized staff in taking initiative to aid the company’s operations.  Indeed the lowest price that the company can charge is $250 as revealed by the calculations above.

Question 3

Decision of Paul Pecos

Marginal Costing Profit Statement
$
Sales Revenue (see note 1)
286,500
Variable Costs:

Direct Materials ($125 x 925)
115,625
Direct Labor ($50 x 925)
46,250
Variable Overheads ($30 x 925)
27,750
Contribution
96,875
Fixed Costs
450,000
Net (Loss)
(353,125)
Note 1 – Sales Volume and Revenue

Details
Selling Price

$
Volume
Sales Revenue

$
Sam Smoothtalk

Offer 1

Offer 2
310

305
200

150
62,000

45,750
Harry Hustler

Offer 1

Offer 3

Offer 4
305

300

330
50

100

75
15,250

30,000

24,750
Gary Giftofgab

Offer 1

Offer 3
305

325
250

100
76,250

32,500

925
286,500
According to lowest price of $250 set in Question 2

Marginal Costing Profit Statement
$
Sales Revenue (see note 2)
578,000
Variable Costs:

Direct Materials ($125 x 1,925)
240,625
Direct Labor ($50 x 1,925)
96,250
Variable Overheads ($30 x 1,925)
57,750
Contribution
183,375
Fixed Costs
450,000
Net (Loss)
(266,625)
Note 2 – Sales Volume and Revenue

Details
Selling Price

$
Volume
Sales Revenue

$
Glenda Goodperson

Offer Taken
290
700
203,000
Sam Smoothtalk

Offer 1

Offer 2

Offer 3
310

305

295
200

150

300
62,000

45,750

88,500
Harry Hustler

Offer 1

Offer 3

Offer 4
305

300

330
50

100

75
15,250

30,000

24,750
Gary Giftofgab

Offer 1

Offer 3
305

325
250

100
76,250

32,500

1,925
578,000
Question 4

The firm is sustaining a loss both under Paul Pecos decision rule and under the suggested selling price due to the high fixed costs incurred.  Indeed if the firm reaches the 20,000 units sale, the net loss would still amount to $145,000 {($95 x 20,000) – $450,000}.  In this respect, the organization should either seek to use the machinery presently used to produce other profitable products, or undertake cost control exercises in order to diminish unnecessary costs, which are not adding value in the production line.
Reference:

 

Lucey T. (2003). Management Accounting. Fifth Edition. Great Britain: Biddles Limited.

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