Management Accounting: Case Study Company Coco Company Coco is a luxury chocolat
ID: 2571323 • Letter: M
Question
Management Accounting: Case Study Company Coco
Company Coco is a luxury chocolate manufacturer, which has recently been performing well. The board of directors is considering how it should expand the business and is looking at a number of options. First, the directors need to produce a budget for the coming year and ensure that the business can maintain its profitability.
The marketing and production directors have given you, the management accountant, details of estimated product sales volumes and proposed sales prices, as well as expected raw material and factory costs. They plan to produce 20 chocolate bars in every direct labour hour.
The sales director is confident that he could increase sales prices with a small decrease in sales volume.
The marketing director would like to expand the product range by buying in fruit and nut chocolate bars from a supplier but has asked you to estimate what it would cost the company to make them instead.
The managing director has ambitious
plans to buy a moulding machine to save labour and packaging labour costs. Table MA.1
Volume chocolate bars
Selling price per bar £
Cocoa grams per bar
Sugar grams per bar
Milk millilitres per bar
Dark
80,000
2.00
170
30
0
Milk
140,000
1.80
130
40
30
White
60,000
2.00
0
70
130
Raw material costs
£4 per kg
£2 per kg
£1 per litre
Indirect costs*
£k
Rent
18.2
Utilities
13.8
Factory administration
12.7
Marketing and sales
47.4
Administrative salaries
38.5
Table MA.2
*Factory indirect costs are currently allocated on a blanket rate. Packaging is estimated at £200 per 1,000 bars.
Direct labour costs are expected to be £10 per hour.
REQUIRED:
c) Assess the proposal of the sales director to improve company profitability by increasing sales prices and reducing sales volume, as in Table MA.3 . What other factors might affect pricing decisions?
d) Using the information in Table MA.4, advise the marketing director on whether it would be more beneficial to make fruit and nut bars rather than buy them in from another company for £1.70 per bar. What other considerations need to be taken into account?
e) The managing director has given you some estimates on which to base your calculations for the new moulding machine. If the business invests £300,000 in equipment, he forecasts that they could save 50% of direct labour costs and 25% of packaging costs; but utility costs would increase by 5%. By calculating the net present value over the next five years using a discount rate of 7%, advise the board whether it should invest in this project. You should also outline the limitations and non-financial factors that need to be considered.
Table MA.3
Sales director’s volume and price assumptions
Increase price
Decrease volume
Dark chocolate bars
10%
10%
Milk chocolate bars
5%
5%
White chocolate bars
No change
No change
Table MA.4
Fruit and nut: raw material costs
Per bar
Quantity
Cost
Cocoa, sugar, and milk
Assume 50% of milk bar
Fruit
50g per bar
£4 per kg
Nut
50g per bar
£8 per kg
Direct labour, packaging, and factory overhead
Cost per bar: use same assumptions
as other chocolate bars
Volume chocolate bars
Selling price per bar £
Cocoa grams per bar
Sugar grams per bar
Milk millilitres per bar
Dark
80,000
2.00
170
30
0
Milk
140,000
1.80
130
40
30
White
60,000
2.00
0
70
130
Raw material costs
£4 per kg
£2 per kg
£1 per litre
Explanation / Answer
3. Assuming no increase in any fixed costs
Given Scenario Current Profitability: Dark chocolate bars Milk chocolate bars White chocolate bars Sales volume 80000 140000 60000 Selling price /unit 2 1.8 2 Raw Materials /unit Cocoa 4/1000*170,*130,*0 0.68 0.52 0 Sugar 2/1000*30,*40,*70 0.06 0.08 0.14 Milk0,1/1000*30, *130 0 0.03 0.13 R/Mat.cost/unitTotal 0.74 0.63 0.27 Direct labor 1/20*$ 10 0.5 0.5 0.5 Total direct costs 1.24 1.13 0.77 Packaging 200/1000 0.2 0.2 0.2 Total variable costs 1.44 1.33 0.97 Contribution /unit(s.p-V/costs) 0.56 0.47 1.03 Total contribution Sales*Contn/unit 44800 65800 61800 172400 Less:indirect costs 130.6*1000 130600 Net Profit 41800Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.