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Begin inventory +production cost = sales +end inventory

Part 2 : Decide to add or delete a product line using relevant

information

Example:Dep1 Dep2 Total DepII

Sales 7000 8000 15000 8000Less V.C (6000) (7000) (13900) (7000)C.M 1000 1000 2000 1000Less F.C

Avoidable cost (100) (300) (400) (300)Un avoidable (800) (100) (900) (900)

O/I 100 600 700 (200)

In this example we must keep dept. 1

Avoidable Cost: are costs that will not continue if an ongoing operationis changed or deleted

Unavoidable Cost: are costs that will continue even if operation halted

To decided to delete Dep. 1 or notIf the remaining C.M after reducing avoidable fixed cost will not contribute

any $ for covering F.COr C.M > avoidable fixed costs

Example:Dep1 Dep2 Total DepII

Sales 7000 8000 15000 8000Less V.C (6800) (7000) (13900) (7000)C.M 200 1000 1200 1000Less F.C

Avoidable cost (100) (300) (400) (300)Un avoidable (1100) (100) (1200) (1200)

O/I (1000) (600) (400) (500)

In this example we must closed dept. 1Example:X Y Total YII

Sales 5000 4000 9000 4000Less V.C (3000) (2000) (5000) (2000)C.M 2000 2000 4000 2000Less F.C

Avoidable cost (1500) (1000) (2500) (1000)

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Un avoidable (2000) (500) (2500) (2500)O/I (1500) (500) (1000) (1500)

In this case we closed X

Part 3 : Compute a measure of product profitability whenproduction is constrained by scareresource.

Example:A B Total

UCM $5 $8Units 100 200C.M 500 1600 2100

Our capacity is 4000 Machine hours, and unit from product A needs 2 H andfrom product B 10 HCM/ H for product A = 5/2 =2.5CM/ H for product B = 8/10 =0.8

We can produce 2000 from product AFor product A 2000 X 2 X2.5 = 10,000 or

We can produce 400 from product BFor product B 400 X 10 X0.8= 500

Before introducing the effect of scarce resource B mach better than ProductA, but after producing a scarce resource product A muchbetter than product B

Part 4 : Discuss the factors that influence pricing decisionsin practice.

Chapter 5 2

Theoretical Capacity1000 u

Practical Capacity800 u

Expected Capacity

700 u

200u

1

0

0

Un avoidable

interruption

Idle Capacity

Excess Capacity

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Managerial Accounting and control

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Theoretical Capacity: The Maximum number of units can be produced inpractice

Un avoidable interruption : Due to bad quality of row material for example

Practical Capacity : What can actually produced

Expected actually Capacity : What we decided to produced

Expected actually capacity based on demand available in local demand

Demand > P.c --------- Idle Capacity

Demand < P.C ------- Excess Capacity

Managerial Cost : an additional cost resulting from producing one additional

unit ( F.C+V.C)

Example: Unit cost price 5 Volume Total Total

1 2000+5 20052 2000+10 2010

100 2000+500 2500101 2000+505 2505

Managerial cost equal 5

Managerial Revenue : an additional revenue resulting from sale of one

additional unit

Example: Unit sales price 50 Volume Total Total

100 5000+500 5500101 5000+505 5505

Managerial revenue equal 50

Price elasticity: is the effect of price changes on sales volume

Difference in price / deference in sales

If we change price by 10 % what I

Sales Price1000 151200 14,5

Price elasticity = 0.5 /200

Chapter 5 3