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Bifurcation of Different Costs of the Business

Discuss About The Bifurcation Of Costs Uniform Manufacturing.

J & B Sports is a sports uniform manufacturing concern. The present case deals with only one product segment of the firm and i.e. Jerseys. The different scenario cases of sales and costs are analyzed in the present case.

The variable costs are those costs that changes with the change in the level of production units. In the present case, costs of goods sold and cost of price tags that attached to the Jerseys are variable costs because of the fact that these costs are easily allocable to each unit manufactured by the firm (Hansen, Mowen & Guan, 2007). Along with this, the sales commission which is paid as a certain percentage of sales is also a variable cost as it will vary with the change in the level of sales quantity of Jerseys. The payroll cost of $ 5000 which is paid on the monthly basis to the staff of the J&B sports is a fixed amount and it does not change with the change in the level of production and hence it will be classified as fixed cost (Horngren, 2002). Therefore, the overall payroll cost must be classified as semi-variable or mixed cost. Further, the rental cost of credit card processing equipment and website hosting cost is also of fixed nature as it will remain same irrespective of the quantum of production undertaken by the firm. The inventory insurance cost of the firm must be classified as the step cost as it will change within the different range of sales quantity and not with the change in the every single unit (Horngren, 2002).

a) Mixed Cost

b) Fixed Cost

c) Variable Cost

d) Variable Cost

e) Step Cost

f) Fixed Cost

Part a) operating profit equation:

Operating Profit Equation=

Sales * PV Ratio - Fixed Expenses

1039500 * 20% - 168000

 $                                                                                                                             39,900.00

Workings

PV Ratio = Contribution/ Sales

207900/1039500

20%

Revenue- Cost of goods sold - operating expenses

1039500-769230-(62370+116500+51500)

 $                                                                                                                             39,900.00

The firm has sold total of 51975 units in the current year and at this level it has attained an operating income of $ 39900. Further, in the present case it has also been determined that if the firm has attained the above profit by selling only 90% of the total expected units. If 100% of the expected units are sold then the total number of Jerseys that would have been sold were 57750. At this level, the operating profit would be $ 63000.

Number of Jerseys sold this year

Total Sales

Selling Price Per Unit

 $               1,039,500.00

 $                             20.00

Number of Jerseys sold this year

51975

Number of Jerseys sold this year

51975

These units are 10% less than the units that were originally expected

Units sold = 90% of Total Estimation

Therefore, total units planned

51975/90%

57750

Number of Jerseys sold

51975

57750

Sales

 $               1,039,500.00

 $  1,155,000.00

Less : Variable costs

Cost of goods sold

 $                  769,230.00

 $      854,700.00

Sales Commission

 $                     62,370.00

 $        69,300.00

Total Variable Expenses

 $                  831,600.00

 $      924,000.00

Contribution per unit

 $                  207,900.00

 $      231,000.00

Less: Fixed Cost

Selling Expenses

 $                  116,500.00

 $      116,500.00

Administrative Expenses

 $                     51,500.00

 $        51,500.00

Total Fixed Costs

 $                  168,000.00

 $      168,000.00

Operating Income

 $                     39,900.00

 $        63,000.00

Less Tax @ 30%

 $                     11,970.00

 $        18,900.00

Profit After Tax

 $                     27,930.00

 $        44,100.00

The more income after tax the extra 10% of sales would have generated

=$44,100-$27,930

=16,170

 

Further, as a part of report it has also been analyzed that if 55000 jerseys were sold, the total expense will increase to the level of $ 1,796,000. This change in the total expenses is due to the change in the variable cost per unit manufactured and sold. The fixed cost will remain same irrespective of the level of manufacturing units due to its core nature.

Total Cost if total number of units sold is 55000

Variable costs

Workings

Cost of goods sold

 $                  814,000.00

(55000*14.80)

Sales Commission

 $                     66,000.00

(55000*1.20)

Total Variable Expenses

 $               1,628,000.00

Fixed Cost

Selling Expenses

 $                  116,500.00

Administrative Expenses

 $                     51,500.00

Total Fixed Costs

 $                  168,000.00

Total Cost @ 55000 units

 $               1,796,000.00

Sales * PV Ratio - Fixed Expenses

1039500 * 20% - (168000+20000)

 $  19,900.00

Furthermore, the proposal of advertisement campaign in the local news-paper by the firm is being analyzed in the report for the next year. It has been found that if advertisement is taken up, there will be an increase in the number of Jersey’s to be sold by the firm in the next year, as it will allow more customers to be attracted towards the firm (Zimmerman & Yahya-Zadeh, 2011).  The operating profit at this level of sales will be $ 52000.

Number of Units

60000.0

Workings

Sales

 $               1,200,000.00

(60000*20)

Less : Variable costs

Cost of goods sold

 $                  888,000.00

(60000*14.8)

Sales Commission

 $                     72,000.00

(60000*1.20)

Total Variable Expenses

 $                  960,000.00

Contribution per unit

 $                  240,000.00

Less: Fixed Cost

Selling Expenses

 $                  116,500.00

Administrative Expenses

 $                     51,500.00

Additional Fixed Cost (Advertisement)

 $                     20,000.00

Total Fixed Costs

 $                  188,000.00

Operating Income

 $                     52,000.00

Less Tax @ 30%

 $                     15,600.00

Profit after tax

 $                     36,400.00

Conclusion:

It is recommended to the firm must take up the advertisement campaign as it will increase the profits after tax by $ 8740 after recovering the cost of advertisement too.

References:

Hansen, D., Mowen, M., & Guan, L. (2007). Cost management: accounting and control. Cengage Learning.

Horngren, C. T., Bhimani, A., Datar, S. M., Foster, G., & Horngren, C. T. (2002). Management and cost accounting. Harlow: Financial Times/Prentice Hall.

Horngren, C. T., Sundem, G. L., Stratton, W. O., Burgstahler, D., & Schatzberg, J. (2002). Introduction to Management Accounting: Chapters 1-19. Prentice Hall.

Zimmerman, J. L., & Yahya-Zadeh, M. (2011). Accounting for decision making and control. Issues in Accounting Education, 26(1), 258-259.

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