The US division of Swiss Chocolate has a budget directive to achieve a specific level of operating income for the period. If the specific level of operating income is achieved, the plant manager, Rick White, will receive a bonus.White communicated the requirements to management and requested that the managers estimate their departmental costs and submit to Smith for compilation of the operating budget for the period.When the projected budget costs were compiled, Smith noted that managements estimates of costs were less than anticipated, which resulted in a higher anticipated level of operating income than the target established by the Swiss home office. White was informed of this, and made a suggestion to increase costs within the budget in order to provide a buffer in case an unexpected event occurred resulting in greater spending. Smith was greatly concerned with Whites request. Rick indicated that this was just his suggested approach to risk management.

First, create a sample budget based on Unit 1 and Unit 2's financials.

Assign responseability centers.

What type of practice is Rick suggesting?

What are the ethical implications for Steve in this situation?

What would you suggest Steve do to solve this dilemma?

Information:

Swiss Chocolate Manufacturing Company	Variable Costs Total	Fixed Costs Total
Raw materials	200,000
Direct manufacturing labor	100,000
Indirect manufacturing labor		52,500
Factory insurance and utilities		31,500
Depreciation machinery and factory		38,500
Repairs and maintenance factory		14,000
Selling, marketing, and distribution expenses	20,000	40,000
General and administrative expenses		60,000

Swiss Chocolate Manufacturing Company	Jun-15	Jul-15
Raw materials inventory	$ 77,000	91,000
Work-in-process inventory	$ 73,500	70,000
Finished goods inventory	$ 63,000	80,500
Purchases of raw materials		$ 262,500
Direct manufacturing labor		87,500
Indirect manufacturing labor		52,500
Factory insurance		31,500
Depreciation machinery and factory		38,500
Repairs and maintenance factory		14,000
Selling, marketing and distribution expenses		40,000
General and administrative expenses		60,000
Revenues		$ 1,050,000

Swiss Chocolates U.S. division will be diversifying its product line to include two product offerings, a basic plain milk-chocolate candy bar, and a fruit-infused high cacao content premium candy bar. The candy bars are processed through a molding operation in which molten chocolate is injected into a mold and cooled to room temperature, removed from the mold, and packaged for storage and bulk palletized shipment.

Below is information regarding the direct costs and volumes of the two major products:

Variable cost and volume data	Milk chocolate	Premium cacao
Raw materials	$0.50	$0.75
Direct labor	$0.25	$0.40
Selling and general	$0.05	$0.05
Volume in units	300,000	100,000

Sales prices of the two products are $2.65 for milk chocolate and $4.99 for premium cacao. The number of hours required to manufacture each unit was the same for both products.

ABC Cost Pools	Indirect manufacturing labor	Factory Insurance & Utilities	Depreciation -- Machinery and factory	Repairs and maintenance -- factory	Selling, marketing and distrubution expenses	General & administrative expenses
Product Development	$ 25,000
Setup Candy Molding Equipment	$ 12,000		$ 18,500
Equipment Operations	$ 15,500	$ 31,500	$ 20,000	$ 10,000
Shipment Preparation					$ 20,000
Distribution				$ 4,000
Administration					$ 20,000	$ 60,000
Totals	$ 52,500	$ 31,500	$ 38,500	$ 14,000	$ 40,000	$ 60,000

ABC cost allocation percentages	Milk chocolate	Premium cacao
Product development	20%	80%
Setup candy molding equipment	60%	40%
Equipment operations	75%	25%
Shipment preparation	70%	30%
Distribution	65%	35%
Administration	50%	50%

	Milk chocolate	Premium cacao	Total
Sale price	795000	499000	1294000
Less: variable cost			0
Direct raw material	150000	75000	225000
Direct labor	75000	40000	115000
Selling and general overhead	15000	5000	20000
Contribution margin (B)	555000	379000	934000
Contribution margin per unit(B/units)	1.85	3.79
Cost of product	0.8 = (2.65-1.85)	1.2 = (4.99-3.79)

2

	Milk chocolate	Premium cacao	Total
Sale price	795000	499000	1294000
Less: variable cost			0
Direct raw material	150000	75000	225000
Direct labor	75000	40000	115000
Selling and general overhead	15000	5000	20000
Contribution margin (B)	555000	379000	934000
Contribution margin per unit(B/units)	1.85	3.79
Cost of product	0.8(2.65-1.85)	1.2(4.99-3.79)
Less: fixed cost
Indirect manufacturing labor	39375	13125	52500
Factory Insurance and Utilities	23625	7875	31500
Depreciation Machinery and Factory	28875	9625	38500
Repairs and Maintenance Factory:	10500	3500	14000
Selling, Marketing and Distribution Expenses	30000	10000	40000
General and Administrative Expenses	45000	15000	60000
Net profit	377625	319875	697500

3 & 4

Category of Activity	Milk chocolate	Premium cacao	Total cost
Product development	5000	20000	25000
Setup Candy Molding Equipment	18300	12200	30500
Equipment Operations	57750	19250	77000
Shipment Preparation	14000	6000	20000
Distribution	2600	1400	4000
Administration	40000	40000	80000
Allocation of factory overhead and period cost	137650	98850	236500

5

	Milk chocolate	Premium cacao	Total
Direct raw material	150000	75000	225000
Direct labor	75000	40000	115000
Selling and general overhead	15000	5000	20000
Product development	5000	20000	25000
Setup Candy Molding Equipment	18300	12200	30500
Equipment Operations	57750	19250	77000
Shipment Preparation	14000	6000	20000
Distribution	2600	1400	4000
Administration	40000	40000	80000
Total cost	377650	218850	596500
Per Unit cost	1.259	2.1885

6

	Milk chocolate	Premium cacao	Total
Sale price	795000	499000	1294000
Less: variable cost			0
Direct raw material	150000	75000	225000
Direct labor	75000	40000	115000
Selling and general overhead	15000	5000	20000
Contribution margin (B)	555000	379000	934000
Less: Fixed cost
Product development	5000	20000	25000
Setup Candy Molding Equipment	18300	12200	30500
Equipment Operations	57750	19250	77000
Shipment Preparation	14000	6000	20000
Distribution	2600	1400	4000
Administration	40000	40000	80000
Net profit	417350	280150	697500

7

	Milk chocolate	Premium cacao	Total
Net profit as per traditional costing	377625	319875	697500
Under ABC	417350	280150	697500
Difference	39725	-39725 A. Prime cost - 248,500+87,500=336,000 Work cost incurred- 336,000+52,500+31,500+38,500+14,000=472,500 Cost of good manufactured 472,500+73,500-70,000=476,000 B. Gross profit 1,050,000-476,000=574,000 Net profit before tax - 574,000-60,000-40,000=474,000 Net profit after tax - 474,000-142,200=331,800 C. Gross profit margin=574,000/1,050,000=55% Net profit margin=331,800/1,050,000=31.6% D. Swiss Chocolates has a gross margin and net profit margin of 55% and 31.6% while its closest competitor has a gross margin and net profit of 50% and 15%. Therefore, between the two competitors, Swiss Chocolate has performed better because their gross profit margin and net profit margin increases gradually. Problem 2 A. Total variable costs= 320,000 Total fixed costs= 236,000 Contribution margin-1,050,000-320,000=730,000 Contribution margin per unit- 730,000/400,000=1.825 B. Break even points in units - 236,000/1.825=129,315.07 Sales price per unit- 1,050,000/400,000=2.625 Break even points in dollars - 129,315.07*2.625=339,452.06 Margin of safety - 1,050,000-339,452=710,548 Degree of operating leverage- (1,050,000-320,000)/(1,050,000-320,000-236,000)=(730,000/494,000)=1.48 C. Contribution per unit- 1.83-0.05=1.78 Fixed cost - 236,000+40,000=276,000 Pre taxed desired net income- (150,000/0.7)=214,285.71 Units to be sold- (276,000+214,285.71)/1.78=275,441.41 Desired sales - 275,442*2.625=723,035.25 D. (236,000+214,285.71)/1.78=252,969.50 units (276,000+214,285.71)/1.83=267,915.69 units An increase in fixed costs is a greater challenge because more units need to be sold by Swiss chocolate so that they can achieve the desired level of profit.