Case 1 Cost-Volume-Profit (CVP) analysis + marginal analysis

You are the manager in Bright company that produces paper bags for food shops and supermarkets. You are provided with following information:

• Bright company is able to produce 80,000 packs of bags.
• Its current sale volume is 60,000 packs of bags per year. This has achieved its maximum sale force.
• Current selling price is $12 per pack of bags.
• Variable costs in total are $240,000;
• Fixed costs are $ 150,000.

A newly established shop has approached you, informing a willingness of purchasing 10,000 packs of bags per year at a price of $6 for each bag. If this proposal is accepted, unit variable costs would remain the same however fixed costs would increase by $10,000 per year.

Required:

1. Discuss whether this proposal is worthwhile from a financial point of view.

1. Analyze, if your competitor in the paper industry knows the above cost and price information, what action(s) may the competitor take to beat you in the market.

Case 2 Activity-based Costing (ABC) vs. Time-based Costing

Hello company manufactures three products, A, B and C.Forecast data concerning overheads (indirect costs) of the products for the next period as follows.

	A	B	C
Forecast output (units)	50	60	80
Machine hours per unit	2	3	4
Number of customer orders	10	10	15
Number of quality control inspections	20	30	20
Number of engineering consultancies	10	8	7
Areas of workshops (m2)	2,500	5,000	2,500

Cost pools and related cost drivers

Cost pool $ Cost driver

Machine operating 30,000 Machine hours

Order processing 7,000 No. of customer orders

Quality control 4,000 No. of quality control inspections

Engineering consultancy 2,500 No. of engineer consultancies

Rent of the campus 10,000 Areas of workshops

Required

Calculate the overhead cost to be absorbed by each of the products using the following absorption costing methods.

1. A traditional absorption method based on a machine hour rate.

(2) An activity-based method, using the relevant cost drivers to trace overhead costs to the individual products.

Case 3: Flexible budgets and variance analysis

Mary is a principal of a school which provides education and accommodation for students. The school secretary prepared the following summary of costs for 2020, including a column showing the original budget for 2020.

The School - cost analysis	2020 budget	2020 actual
Number of students	200	180
Fixed costs
Utilities	$ 60,000	$ 64,000
Janitorial services	40,000	38,000
Repairs and maintenance	32,000	28,000
Salaries for non-convent employees	180,000	190,000
Total fixed costs	312,000	320,000
Variable costs
Food	1000,000	920,000
Clothing	90,000	82,000
Laundry & Linen Service	30,000	25,000
Educational costs	60,000	52,000
Allowances	50,000	48,000
Total variable costs	1,230,000	1,127,000
Total Costs	1,542,000	1,447,000

Mary is pleased that total costs were below budget for the year, but she wonders if this is partly due to the fact that the school enrolled fewer children than expected for the year.

Required:

1. Prepare a flexible budget for 2020, based on the number of children actually enrolled in 2020.
2. Should Mary be satisfied with the school's cost management in 2020? Explain.