MagazinesBB.com by Epstein Lita;

Author:Epstein, Lita; [Epstein, Lita;]
Language: spa
Format: epub, mobi
Published: 2021-04-22T19:31:27+00:00

Using Cost Information to Make Decisions ( continued ) Drop a Product Line Decision

Garden supplies

Plants

Total

• Must consider both costs and revenue impact.

Sales

$75,000

$150,000 $225,000

• Use a variable costing income statement by product line.

EX: A landscape company sells tools, garden supplies, and plants. Tools can Cost of goods sold

$35,000

$50,000

$85,000

be found in any hardware store. Tools are not a profit maker. What would be Contribution margin

$40,000

$100,000 $140,000

the impact if the landscape company stops selling tools?

Direct fixed costs

$2,000

$3,000

$5,000

Current variable costing income statement:

Allocated fixed costs

$19,800

$40,200

$60,000

Tools

Garden supplies

Plants

Total

Total fixed costs

$21,800

$43,200

$65,000

Sales

$50,000

$75,000

$150,000

$275,000

Net income (loss)

$18,200

$56,800

$75,000

Cost of

$40,000

$35,000

$50,000

$125,000

Dropping the tools line would result in a loss of $9,000 in net income ($84,000 – $75,000).

goods sold

This shows how that changes with an incremental analysis of costs and revenues: Contribution

$10,000

$40,000

$100,000

$150,000

Lost sales

($50,000)

margin

Cost savings

Direct fixed costs

$1,000

$2,000

$3,000

$6,000

Cost of goods sold (tools not bought)

$40,000

Allocated fixed

$10,800

$16,200

$33,000

$60,000

Direct fixed costs (salesperson not needed)

$1,000

costs

Total cost savings

$41,000

Total fixed costs

$11,800

$18,200

$36,000

$60,000

Net loss from dropping the tools product line ($9,000) Net income (loss)

($1,800)

$21,800

$64,000

$84,000

Decision: The tools line absorbed fixed costs and made other lines look more profitable.

Tools are operating at a $1,800 loss. The company can save $40,000 in Dropping tools would inconvenience customers and would be a mistake.

cost of goods sold, but fixed costs will need to be allocated on remaining Qualitative Considerations for Decision-Making product lines.

• Before making any decision, consider the impact on: Without tools, total sales will be $225,000, about 33% will be from garden

-Your customers and the service they expect

supplies, and 67% will be from plants.

-Employees and the impact on morale of the decision, (e.g., firing a salesperson) Revised variable costing statement reflecting changes after the tools product

-Contract obligations with your vendors or lenders line is dropped:

• No decision can be made just based on the numbers Pricing Decisions

Internet customer

Profit-Maximizing Price

- Determining demand to set volume for analysis

Revenue

$500,000

• Set highest-possible price to make most profit

(if volume is overestimated, the company may not

Cost of goods sold

$425,000

-If price is too high, may not cover costs of operating reach its profit goal)

Gross margin

$75,000

business because of decreased sales

Target Costing

Less allocated fixed costs

- The company could make more per sale but lose • Starts with market research to: 135 Internet orders × $1.12

$152.20

business

- Analyze competing products

• The goal of setting a profit-maximizing price is to 10 fax orders × $3.09

$30.90

- Determine customer wants and needs

find the right price to generate the highest demand 1,500 line items × $0.75

$1,125

- Design a product or service based on the features and and make a maximum profit

a price that will attract most customers

1,100 miles × $0.53

$583

-Test the price of the product at several locations to • Next, determine profit margin goal.

750 pounds × $0.40

$300

see which generates the greatest volume of business

-In designing a new product or service, cost decisions 150 returns × $0.70

$105

$2,296.10

- Estimate demand at each price point

stay within pricing parameters set.

Customer profit

$72,703.90

- In the example below, at a price point of $250

› Could mean change in design to keep production

Profit as % of sales

14.5%

demand is 1,000 units with a $125,000 profit

costs down

Mail-order customer

Profit-Maximizing Price Spreadsheet

› Could need to change raw materials to meet costing goals

Revenue

$495,000

Total

Contribution Contribution

- For success, establish product

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.