Term Paper on "Accounting for Business Decision-Making"
Term Paper 4 pages (1012 words) Sources: 4 Style: APA
[EXCERPT] . . . .
Accounting for Business Decision MakingEvaluate Paul Pecos' decision rule
Pecos Printers, Inc., just like other companies, must earn profit to stay in the game, afford inflation and keep its business operating. As founder and CEO of the Company, Mr. Paul Pecos wanted to earn and maximize its profit.
Pecos Printers, Inc. made a bold but good move in introducing new product in the market. PP7500 is a competitive product which may equal or exceed the competitors'. To strengthen the move, Pecos did right in strategizing market penetration by considering offering lower price to distributors.
Peco's controller, Mr. Ledger, made an analysis of $295 unit cost composing of $245 variable cost and $50 fixed cost. It was mentioned that estimated total fixed cost for the year would amount to $475,000 with 15,000 projected production and 20,000 maximum production capacity.
Mr. Pecos-based PP7500's selling price on Mr. Leger's cost analysis. With the figures presented, he believed that to earn target income, the Company would need to sell the unit for $300 and up. However, there are certain points the Mr. Ledger failed to consider in analyzing the cost-volume-profit relationship.
The following are certain points Mr. Ledger was not able to consider:
475,000 fixed cost
At a level of up to 20,000 units produced, total fixed cost would not change.
In Mr. Ledger's computation, estimated fixed cost is at $50 a unit. He based the computation at 9,500 ($475,000 divided by $50) production.
Fixed cost can be computed a
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Assuming that $475,000 fixed cost is spread out evenly during the year, fixed cost can be computed at $39,583.33 monthly or 31.6666 per unit*.
475,000 / 15,000** units = 31.6666 fixed cost per unit assumption: total 15,000 units to be produced during the year
Sale of a unit to at least $300
As a result of the over estimation of fixed cost per unit, the approved selling price by Mr. Pecos is higher. Unit cost is lower than previous estimation:
Mr. Ledger's Computation
New Computation
Variable Cost
Fixed Cost
Total Cost per Unit
The Company could have accepted orders below $300, increase its sales volume and still generate profit. At a lower selling price, distributors would be enticed to purchase more units.
Evaluate Paul Pecos' reaction to Ms. Goodperson's sale
The move of Mr. Pecos to immediately terminate his Office Assistant Manager had been really drastic and de-motivating for other employees. Ms. Goodperson may even have a valid reason why she committed the transaction with the new distributor. He could have reevaluated cost-profit planning considering the number of units he could have sold.
With the previous cost analysis, the Company could have benefited with Ms. Goodperson's move. And considering the large volume of Distributor's order, it could have earned bigger profit. Below is the opportunity cost or lost benefit for not accepting potential sale:
300 and up sales price
AND
290 sales price contracted by Ms. Goodperson
Benefit Forgone
Sales
Variable Cost
245 per unit)
925*245-226,625.00)
398,125.00)
Fixed Cost
Income sales orders the Company accepted
The Company could… READ MORE
Quoted Instructions for "Accounting for Business Decision-Making" Assignment:
Pecos Printers, Inc.
Pecos Printers, Inc. is a small manufacturing firm in Houston, Texas that manufactures color ink jet printers for the small business market. It has just launched the PP 7500.
A 50% markup is standard in this industry so that Pecos must sell to distributors below $400 per printer to keep the retail price below the industry top of $600 ($400 * 150% = $600). Paul Pecos, the founder and CEO of Pecos Printers, wants to keep the price to distributors as low as possible so he has carefully engineered his manufacturing process to be as efficient as possible.
The model PP 7500 is an exceptionally desirable model with the following features:
A monthly capacity of 10,000 copies
A print speed of 10 copies per minute for black and white and 5 copies per minute for color.
A lifetime capacity of 120,000 copies.
The ability to accept readily available HP ink cartridges.
Lester Ledger, the Pecos Controller has developed the following cost sheet for the model 7500:
Cost Category Cost per Unit
Direct Materials (variable) $150
Direct Labor (variable) 60
Overhead (Variable) 35
Overhead (Fixed)* 50
Total Unit Costs $295
*This is determined on a per unit basis as followed. Lester assumes that the annual fixed overhead costs for this product will be $475,000 and that approximately 15,000 Model 7500's will be produced during the current year. Pecos has the capacity to produce 20,000 units per year without increasing fixed costs.
Paul has determined that approximately 20% of the total manufacturing costs are necessary for a decent profit. Therefore, the minimum wholesale cost for this model is $354 ($295 * 120%) and the resulting minimum retail price is $531 ($354 * 150%).
Based on these data, Paul has developed the following pricing rule for his sales staff: Accept any offer from distributors of $300 or more and reject any offer below $300.
The sales staff is on salary with no commission paid for any sale. The salesmen negotiate with distributors who make firm offers which the Pecos salesmen then either accept or reject. Last month the three salesmen reported the following offers and results:
Offer (per unit) Number of Units Accepted?
Sam Smoothtalk
Offer No. 1 $310 200 Yes
Offer No. 2 $305 150 Yes
Offer No. 3 $295 300 No
Harry Hustler
Offer No. 1 $305 50 Yes
Offer No. 2 $200 250 No
Offer No. 3 $300 100 Yes
Offer No. 4 $330 75 Yes
Gary Giftofgab
Offer No. 1 $305 250 Yes
Offer No. 2 $245 400 No
Offer No. 3 $325 100 Yes
In addition, Ms. Glenda Goodperson, the office assistant manager received an offer from a new distributor for 700 units at $290. She felt this would be advantageous for Pecos and accepted the offer. When Paul Pecos found out about this transaction, he was furious that Ms. Goodperson had violated his decision rule and fired her on the spot. He then cancelled the order with the new distributor.
Overall, Paul was satisfied with the month's sales results. His sales staff had sold 925 units which translated to an annual rate of over 11,000 units. This was 10% above his estimate of 10,000 annual sales.
Required:
1. Evaluate Paul Pecos' decision rule.
2. Evaluate Paul Pecos' reaction to Ms. Goodperson's sale.
3. Prepare a contribution margin income statement for the month with two columns: in the first column, show the results following Paul's decision rule. In the second column, show what the results would have been if you chose to revise the decision rule and your revised decision rule had been followed. Show the calculations. For simplicity sake, ignore non-manufacturing costs and taxes.
4. Do you have any other recommendations for Paul to improve his operations?
How to Reference "Accounting for Business Decision-Making" Term Paper in a Bibliography
“Accounting for Business Decision-Making.” A1-TermPaper.com, 2007, https://www.a1-termpaper.com/topics/essay/accounting-business-decision-making/507377. Accessed 28 Sep 2024.
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