EXPLAIN YOUR ANSWERS AND DISSCUS YOUR FINDINGS ( SHOW YOUR CALCULATIONS ) !!!? A

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EXPLAIN YOUR ANSWERS AND DISSCUS YOUR FINDINGS ( SHOW YOUR CALCULATIONS ) !!!?

Adapted trom ROBERT S KAPLAN INCOM Company The decline in our profits has become intolerable The severe price cuming in pumps has dropped ourpre-ta margin to less than 3%, far below our histoncal 10% margins. Fortunately, our competitors are overlooking the opportunities for profit inflow controllers. Our recent 10% price increase in that line has been implemented without losing any businets. Robert Johnson, president of the INCOM Company, was discussing operating results in the latest month with Ahmed Khan, his controller, and John Scott, his manufactring manager. The meeting among the three was taking place in an atmosphere tinged with apprehension because competitors had been reducing prices on pumps, INCOM's major product line. Since pumps were a commodity product, Johnson had seen no altemative but to match the reduced prices to maintain volume. But the price cuts had led to declining company profits, especially in the pump line (summary operating results for the previous month March 2016, are shown in Exhibits 1 and 2). INCOM supplied products to mamfacturers of water purification equipment. The company had started with a unique design for valves that it could produce to tolerances that were better than any in the incustry Johnson quickly established a loyal customer base because of the high quality of its manufactured valves. He and Scott realized that INCOM's existing labor skills and machining equipment could also be used to produce pumps and flow controllers, products that were also purchased by its customers. They soon established a major presence in the high-volume pump product line and the more customized flow controller line. INCOMs production process started with the purchase of semi-finished components from several suppliers. It machined these parts to the required tolerances and assembled them in the company's modern manufacturing facility. The same equipment and labor were used for all three product Lines, and production rms were scheduled to match customer shipping requirements. Suppliers and customers had agreed to just-in-time deliveries, and products were packed and shipped as completed. Valves were produced by assembling four different machined components (2 components of L12 and 2 of L15). Scott had designed machines that held components in fixtures so that they could be machined automatically. The valves were standard products and could be produced and shipped in large lots. Although Scott felt several competitors could now match Johnson's quality in valves, none had tried to gain market share by cutting price, and gross margins had been maintained at a standard 35%. The manufacturing process for pumps was practically identical to that for valves. Five components G components of L12 and 2 of L14) were machined and then assembled into the final product. The pumps were shipped to inchustrial product distibutors after assembly. Recently, it seemed as if each month brought new reports of reduced pnces for pumps. INCOM had matched the lower prices so that it would not give up its place as a major pump supplier. Gross margins on pump sales in the latest month had fallen below 20%, well below the company's planned gross margin of 35%. Flow controllers were devices that controlled the rate and direction of flow of chemicals. They required more components and more labor, than pumps or valves, for each finished unit. Each Flow controller required 4 components of L16, 5 components of L12 and 1 component of L21. Also, there was much more variety in the types of flow controllers used in industry, so many more production runs and shipments were performed for this product line than for valves. NCOM had recently raised flow controller prices by more than 10% with no apparent effect on demand.

Explanation / Answer

1.

PART 1

Income Statement (in Total of All products) For 24000 units

Material is increased by 5% i.e. 458000 x 5% = $22900
Revised Material Cost = $22900 + $458000 = $480900

Existing Sales = $2152500
Revised Sales = $2194578 [ WN - 1558150 x 1/0.71 ]
Increase In total Selling Price = $42078

PART - 2

No. The profitability margin shows that Product "Flow Controller" needs no increase in Sales price. It's actual margin is already higher than planned margin.
Product "Pumps" Needs to Increase its Selling price because its margin is very low. But in given situation, where other companies selling "Pumps" at lower price the company can increase selling price of "Valves".

Assuming
Company needs to maintain its gross margin @29% on The Value of total Sales, aggregate of all products.

2.
Contribution Margin Income Statement for March 2016 ( (in Total of All products) For 24000 units

Contribution Margin ratio = (861485 / 2152500) x 100 = 40.02% (Approx)

3.

WN - 1 Calculation of General Selling and Admin. Exp For the month April 2016
No of Unit Produced In March 2016 = 24000
Variable General Selling and Admin. Exp = 55965 (See Q. No 3)
Fixed General Selling and Admin. Exp. = $503685 (90% of 559650)
Variable General Selling and Admin. Exp in April 2016 = (55965 / 24000) x 23800 = $55499 (Approx)
Total General Selling and Admin. Exp in April 2016 = $55499 + $503685 = $559184

WN - 2 Calculation of Total Sales For the month April 2016

[Selling Units X Actual Sales Price Per Unit]
Valves = 7600 x $86 = $653600
Pumps = 12000 x $87 = $1044000
Flow controller = 4200 x $105 = $441000
Total Sales(23800 units) In April = $2138600

WN - 3 Calculation of Direct Labour Cost For the month April 2016

[Selling Units X Direct Labour Per Unit]
Valves = 7600 x $10 = $76000
Pumps = 12000 x $12.50 = $150000
Flow controller = 4200 x $10 = $42000
Total Direct Labour Cost In April = $268000

WN - 4 Calculation of Direct Material Cost For the month April 2016

[Selling Units X Direct Material Per Unit]
Valves = 7600 x $16 = $121600
Pumps = 12000 x $20 = $240000
Flow controller = 4200 x $22 = $92400
Total Direct Material Cost In April = $454000

WN - 5 Calculation of Total Manufacturing Overhead Cost For the month April 2016

[Selling Units X Manufacturing Overhead Per Unit(300% of Direct Labour) ]
Valves = 7600 x $30 = $228000
Pumps = 12000 x $37.50 = $450000
Flow controller = 4200 x $30 = $126000
Total Direct Material Cost In April = $804000

Income Statement in Month of April 2016 (in Total of All products)

4.

WN - Calculation of Total Fixed Cost

Total Manufacturing Overhead = $806000
Total Variable manufacturing overhead = ($505800) [see Q. no 2]
Total Fixed manufacturing overhead = $300200
Fixed General Selling and Admin. Exp. = $503685 (90% of 559650)
Total Fixed Cost = $803885

Contribution in March 2016 = $861485 (See Q. No. 2]
No of Units in March 2016 = 24000
Break Even Point in terms of Product = Fixed Cost / Contribution per unit
= ( $803885 x 24000 / $861485 ) = 22396 units (Approx)

Break Even Point in terms of Sales = Fixed Cost / Contribution Margin ratio
= $803885 / 40.02% = $2008581 (Approx)

Particulars Amount in $ Amount in $ Planned margin in % Sales 2194578 100 Direct Labour Expenses 271250 Direct Material ( see workings below) 480900 Manufacturing Overhead 806000 Total 1558150 71% [100% - 29%] Gross Margin 636428 29% General Selling & admin. Exp. 559650 Operating Income 76778 3.5%

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