STATEMENT OF CONTRIBUTION HAS BEEN ATTACHED.
The Board are unhappy with this planned outcome in two respects: they had hoped for a total prot of at least 1,200 to meet their required 20% return on capital; and they are unhappy about the further deterioration of Product A, their oldest product, which on current plans would move from being marginally unprotable this year to highly unprotable next. Responses to the situation varied. Paul Burns, the recently-appointed Financial Controller who compiled the budget, thought that the best response would be to stop making product A. He argued, 'Knowing the unsatisfactory results this budget contains, I took the liberty of doing some rough calculations before coming to this meeting. if we drop A we can eliminate the fixed labour costs associated with it of 120k and sell the machinery specically associated with it which, being old, is now fully-written off but would probably fetch 10K. There will, however, be redundancy costs which I estimate at 45k.' Arthur Mitchell, the Production manager and oldest member of the management team, was outraged. He said, 'That's typical of you accountants. We've been making A since the rm started twenty years ago and it still has steady sales. Also, some of the blokes making it have been with the company a long time. You knew what the situation looked like: why didn't you tell me before the meeting? Can'tl have a bit of time to look for ways of saving costs on the production line?' Paui Burns sneeringly replied, 'If you can do that, why haven't you done so before? I offered to help you look at your costs when I arrived last year, but when I proposed investigating the merits of Activity Based Costing you said you had no time to waste on such nonsense. You can't blame me for not consulting you!' At this point Bob Ben'y, the Marketing manager, roused himself and smoothly announced, 'There's no need for you two to bicker like this. I think the sales position would encourage us to lower the price of A by 2 per unit which I think would raise demand by 30%. IfArthur can save that 2 per unit in variable production costs somehow, why don't we try that combination?' Ben Kates, the Managing Director, now intervened. 'l'd like to compare the effects of adopting Bob's suggestion versus Paul's. Arthur, would you also like to take a little time to think how best you might re-organise production so as to improve matters, and pass your thoughts to Paul for him to turn into nancial gures. And, Paul, I'd like you to try seeing what a simple 13% increase in sales and activity across the board would do, holding prices and everything else constant. After all, we have got a fair bit of spare capacity, haven't we Arthur?' The meeting broke-up at this point, having agreed to proceed on the lines set out by Ben Kates. The next day Arthur Mitchell phoned Paul's office and, having ascertained that he was in, went over to see him. We done some thinking, and I think we could cut labour supervision on Product A which would reduce labour xed costs by 90k but increase the variable overhead element by 12%. We could also substitute a cheaper component for A which would save 80 per unit. Can you please try that and see what it looks like?' Paul replied, 'If I must, but I don't suppose it will do any good.' Before starting his work on revising the budget, Paul reviewed in his mind the following information used in compiling the original budget: 1) all material costs are fully variable 2) the xed element of labour cost for A, B and C is 200k, 150k and ESOOk respectively 3) the overheads are mixed costs. The xed element has been absorbed at the rate of 5 per machine hour irrespective of the machines used. The machine time per unit of each of the products Is: A 15 minutes B 30 minutes C 10 minutes A week later the Oxford Board reconvened to look at the revised budget calculations. Contribution Product A Product B Product C Total labour Ek Ek Ek Ek fixed 200 150 600 950 Product A Product B Product C Total variable 350 150 600 1100 Ek Ek Ek Ek total 550 300 1200 2050 80k units at 10 800 120k units at 20 240 Sales 130k units at 30 3900 7100 Overheads: Materials 600 650 800 2050 units/hr 4 2 6 Labour 550 800 120 2050 no. of units (k units) 80 120 130 Overhead 500 500 900 1900 m/c hours (hours) 20 60 22 Total Cost 650 1450 2900 6000 fixed at f6/hr LOO 300 110 510 Profit/Loss 850 950 1000 1100 variable o/h 400 200 790 1390 total 500 500 006 1900 15 minutes 30 minutes 10 minutes Marginal costing statement Product A Product B Product C sales price/ unit 10 20 30 v.c./ unit: Total contribution= total sales- VC M 7.5 5.41666667 6.153846154 L 4.375 1.25 4.615384615 5 1.666666667 6.076923077 total 16.875 .333333337 16.84615385 Contribution / unit -6.875 11.66666666 13.15384615
