Question:
The Citrus Company produces quality fruit. It has been producing and selling 40,000 boxes
per month during the Spring and Summer months. During the Autumn and Winter months it has been noticed that only 30,000 boxes are sold.The Citrus Company provides the following information and has asked you to provide advice on the issues raised in each of the following parts:
Manufacturing costs
Direct material $4.00 per box
Direct labour 2.00 per box
Variable overhead 0.80 per box
Fixed overhead $10,000
Marketing costs
Variable $0.50 per unit
Fixed $15,000
The Citrus Company has been selling these boxes of fruit for $9.50 each and has asked you to provide answers to the following.Each part is to be considered independently of the others.
Required :
(a) Calculate the monthly profit during a Summer month when all 40,000 boxes produced in a month are sold .
(b) A request has come from overseas to supply 5,000 boxes of fruit per month during the Autumn and Winter months at a price of $7.50 per box .If this request is accepted it would cost an extra $0.40 per box for freight and a one off cost of landing cost of $1000 ..Should this one off request be accepted based on profit alone? What other factors should be considered ?
(c) Another request has come in the form of a long term government contract which wants you to supply 10,000 boxes within the country per month for $8 per box .This contract would be for 10,000 boxes each month for the year .Should this offer be accepted?Provide reasons for your decision.
(d)The Citrus Company has had another request from an outside supplier to supply 8,000 boxes of fruit year round(each month) for a price of $7.80 per box.The Citrus Company would incur additional freight costs of $0.20 per box but no other additional costs .Should the Citrus Company accept this offer on financial grounds?What other factors might it consider?
(e)The Citrus Company has an offer to rent out its property to the government so that affordable housing can be built. The government would pay the Citrus Company Parker $60,000 per month ,assuming it would use the property on an ongoing basis .If Citrus Company sells 40,000 boxes during the Spring and Summer months and 30,000 boxes during the Autumn and Winter months should Citrus Company accept the offer on purely financial grounds ..Show calculations to support your answer.
Answer:
Part A
|
Calculation of total variable cost
|
|
|
Particular
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Amount ($)
|
|
Direct material
|
4
|
|
Direct Labour
|
2
|
|
Variable Overhead
|
0.8
|
|
Marketing Cost
|
0.5
|
|
Total
|
7.3
|
|
Calculation of Fixed Cost
|
|
|
Particular
|
Amount ($)
|
|
Fixed Overhead
|
10000
|
|
Other fixed costs
|
15000
|
|
Amount
|
25000
|
Selling Price per Box = 9.5 $
|
Profit during summer
|
|
|
Particular
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Amount ($)
|
|
Total Revenue
|
380000
|
|
Variable cost
|
292000
|
|
Fixed Cost
|
25000
|
|
Profit
|
63000
|
Part B
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Particular
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Amount ($)
|
|
Total Revenue
|
450000
|
|
Variable Cost
|
438000
|
|
Fixed Cost
|
25000
|
|
Additional cost
|
30000
|
|
Additional landing cost
|
1000
|
|
Profit / (loss)
|
-44000
|
The above offer cannot be accepted on financial factors but the same be considered on the basis of above qualitative factors. As, if the firm seeks the future expansion of the company in that country than the same order should be accepted as the whole variable cost is covered in the selling price. Further, if the company continues transactions with the customer it might be possible that in future it gets other customer order also and the increase in volume of order from same order. Thus the decision cannot be taken on the basis of profit factor alone.
Part C
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Particular
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Amount ($)
|
|
Revenue
|
960000
|
|
Variable Cost
|
73000
|
|
Fixed Cost
|
25000
|
|
Profit
|
862000
|
The above offer can be accepted as the company is earning profit on the same and it is necessary to consider financial factors (Seuring and Goldbach, 2013).
Part D
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Particular
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Amount ($)
|
|
Revenue
|
62400
|
|
Variable cost
|
58400
|
|
Fixed Cost
|
25000
|
|
Additional Cost
|
1600
|
|
Profit
|
-22600
|
The above offer cannot be accepted on the basis of financial grounds. The other factors which should be considered are that it might be possible in future the customer increases the volume of product order or adjust the price and the company is able to earn profits (Lees, 2017.). It can also accept offer by seeking the loss which is incurred now as the cost for attracting more clients in same country.
Part E
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Particular
|
Amount ($)
|
|
Revenue
|
3990000
|
|
Variable cost
|
3066000
|
|
Fixed Cost
|
25000
|
|
Profit
|
899000
|
Rental Income will be $ 720,000 per year.
Citrus company cannot accept the offer and the reason behind the same is that profit on sale of product is more than rental income received from the government. The other factor which can be considered is that as the client is government than they might have to face complications in future.
References
Lees, G. 2017. The management accountant as risk manager. The Routledge Companion to Accounting and Risk.
Seuring, S. and Goldbach, M. 2013. Cost management in supply chains. Springer Science & Business Media.
