Case Study 01:

Cost Benefit Analysis

A business is currently paying $49,500 (GST inclusive) to a payroll company to undertake its weekly payroll for its 80 employees. This is expected to increase to 55,000 in the following year.

The business is considering a proposal to introduce a computerized accounting package into its accounting information system. The accounting package under consideration is a stand- alone package that processes payroll. The cost of the package is $1,650 including GST plus an annual charge of $275 inclusive of GST to cover advice and upgrades. The program is to be treated as an expense in the first year.

The business will need to purchase two personal computers, which will be networked, two Laser printers and appropriate software at a cost of $8,800 inclusive of GST. These are to be depreciated equally over two years.

To operate the package the business will need to spend $32,000 to employ a person qualified in payroll administration, plus statutory superannuation expenses. An additional $4,400 inclusive of GST will be spent to install the system and to train existing staff.

The business will also incur annual operating costs of $5,500 inclusive of GST to maintain appropriate document controls and provide electronic payment of employee pays. Management also requires the hardware to be insured. This will add an additional $110 inc1usive of GST to the business insurance bill each year.

Required: Give a comprehensive report to management in relation to the proposal that explains the cost-benefits of the proposal.

Managerial Accounting, 9th Ed., by Hilton. Case Study 14-63. Please explain in detail so that I can understand and make a decision.

Alberta Gauge Company Ltd, a small manufacturing company in Calgary, Alberta, manufactures three types of electrical gauges used in a variety of machinery. For many years the company has been profitable and has operated at capacity. However in the last 2 years, prices on all gauges were reduced and selling expenses increased to meet competition and keep the plant operating at capacity. Second-quarter results for the current year, which follow, typify experience. Alberta Gauge Company Income Statement Second Quarter (In thousands) Q-Gauge E-Gauge R-Gauge Total Sales $1,600 $900 $900 $3,400 Cost of goods sold 1,048 770 950 2,768 Gross Margin $552 $130 $(50) $632 Selling and admin expenses 370 185 135 690 Income before taxes $182 $(55) $(185) $(58) Alice Carlo, the company president is concerned about the results of the pricing, selling and production prices. After reviewing the second-quarter results, she asked her management staff to consider the following three suggestions. Discontinue the R-gauge line immediately. R-gauge would not be returned to the product line unless the problems with the gauge can be identified and resolved. Increase quarterly sales promotion by $100,000 on the Q-gauge product line in order to increase sales volume by 15 percent. Cut production on the E-gauge line by 50 percent, and cut the traceable advertising and promotion for this line to $20,000 each quarter. Jason Sperry, the controller, suggested a more careful study of the financial relationships to determine the possible effects on the company's operating results of the presidents proposed course of action. The president agreed and assigned JoAnn Brower, the assistant controller to prepare an analysis. Brower has gathered the following information. All three gauges are manufactured with common equipment and facilities. The selling and administrative expenses is allocated to the three gauge lines based on average sales volume over the past three years. Special selling expenses (primarily advertising, promotion and shipping) are incurred for each gauge as follows: Quarterly Advertising and Promotion Q-Gauge $210,000 E-Gauge 100,000 R-Gauge 40,000 The unit manufacturing costs for the three products are as follows: Q-Gauge E-Gauge R-Gauge Direct Material $31 $17 $50 Direct Labor 40 20 60 Variable Manufacturing overhead 45 30 60 Fixed Manufacturing overhead 15 10 20 Total $131 $77 $190 The unit sales prices for the three products are as follows: Q-Gauge $200 E-Gauge 90 R-Gauge 180 The company is manufacturing at capacity and is selling all the gauges it produces. Required: 1. JoAnn Brower says that Alberta Gauge Company's product line income statement for the second quarter is not suitable for analyzing proposals and making decisions such as the ones suggested by Alice Carlo. Write a memo to Alberta Gauge's president that addresses the following points. a. Explain why the product line income statement as presented is not suitable for analysis and decision making. b. Describe an alternative income statement format that would be more suitable for analysis and decision making and explain why it is better.

1. JoAnn Brower says that Alberta Gauge Company's product-line income statement for the second quarter is not suitable for analyzing proposals and making decisions such as the ones suggested by Alice Carlo. Write a memo to Alberta Gauge's president that addresses the following points.

a. Explain why the product-line income statement as presented is not suitable for analysis and decision making.

b. Describe an alternative income-statement format that would be more suitable for analysis and decision making, and explain why it is better.

c. What relevant costs need to be considered before making a decision based on the 3 recommendations?