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Step 1: Allocate Costs

You have been asked to look at production options for the Android01 since production methods and allocation of costs have implications for cost-per-unit. There are two alternative methods of production being considered. Begin by gathering data (using financial information in decision making), then answer various questions to determine the suitability of the project.

Production A

Costs are as follows:

4.5 million per year in rent for factory and machinery

components and labor in the amount of $12 million will produce 300 units per year

Production B

In an alternative production method, the production of Android01 will share some production facilities and service divisions with Processor01. Fixed costs are $5 million per year, and are to be assigned at the rate of 30 percent to Android01 and 70 percent to Processor01.

The variable cost of the production facilities and service divisions is $20 million per year. The square footage of factory space and labor needed for the production of 500 units of Processor01 and 300 units of Android01 are listed below.

Sq. Ft. Labor Processor01 (500 units) 70,000 120Android01 (300 units) 30,000 80

The remaining cost for the production of Android01 is for components, at $25,000 per unit.

Question 1: In Method B, what would be the cost-per-unit of producing Android01 using factory space as the allocation basis? What would be the cost-per-unit using labor as the allocation basis?

Be sure to show your calculations in Excel and provide a narrative analysis. Your narrative analysis should summarize the results of your analysis and make recommendations for the benefit of company.

Step 2: Activity-Based Costing

An alternate method of assigning costs is activity-based costing. The major activity for the production of both Processor01 and Android01 is component assembly. There will be a total of 125,000 assemblies per year for the production of 500 units of Processor01 and 300 units of Android01 at a total cost of $25 million. Each unit of Android01 will require 180 assemblies. The remaining cost for the production of Android01 is for components, at $25,000 per unit.

Question 2: What would be the cost per unit of producing Android01 using activity-based costing

Be sure to show your calculations in Excel and provide a narrative analysis. Your narrative analysis should summarize the results of your analysis and make recommendations for the benefit of company

Step 3: Markup Pricing

Suppose IPS uses markup pricing for Android01. Fixed costs are $4.5 million, and for a level of production of 300 units, the variable cost-per-unit is $48,000.

Question 3: What is the price of the Android01 at 30 percent markup over full cost?

Be sure to show your calculations in PowerPoint and in an Excel spreadsheet. Be sure to show your calculations in Excel and provide a narrative analysis. Your narrative analysis should summarize the results of your analysis and make recommendations for the benefit of company.

Step 4: Choose the Profit-Maximizing Output Level

The CEO’s next question is, “What level of output would be required to maximize our profit on the Android01?” You have calculated the variable cost-per-unit for different levels of production. From market research, you have a schedule of prices for these levels. The information is summarized in the table below:

Number of Units Variable Cost-per-Unit ($) Sale Price-per-Unit ($) 20060,000 70,000 25054,000 66,000 30048,000 64,000 35046,000 59,000 40045,000 52,000

A recommendation on output could affect everyone in the company, from management to sales, to the floor manager and assembly line workers! You don’t want to get this one wrong so you take some extra time to proof your calculations.

Question 4: Based on profit-maximization analysis, what level of output should you recommend to the CEO?

Before starting your calculations, review materials on profit maximization output.

Be sure to show your calculations in Excel and provide a narrative analysis. Your narrative analysis should summarize the results of your analysis and make recommendations for the benefit of the company.

Step 5: Budget

Your CEO has asked you to prepare a production cost budget for the MiniY for May 20X8. The actual costs in April 20X8 were:

MiniY: Production Cost Budget April 20X8 Production–Units of MiniY 3,000 Components cost (variable) 24,000,000 Labor cost (variable) 13,500,000 Rent (fixed) 6,000,000

MiniY: Production Cost Budget Depreciation (fixed) 6,000,000 Other (fixed) 2,000,000 Total$51,500,000

For the month of May, the number of MiniY produced will increase to 3,200, reflecting an anticipated sales increase related to a new marketing campaign.

Question 5: Using the above information, prepare a budget for May 20X8 stating the total cost. Use a spreadsheet to display your data and calculations.

Before starting your calculations, review materials on integrating accounting and financial information.

Be sure to show your calculations in Excel and provide a narrative analysis. Your narrative analysis should summarize the results of your analysis and make recommendations for the benefit of company.

Step 6: Profit or Loss

IPS operates a factory which produces the MiniY and the MiniX. During September 20X8, the factory produced 500 units of MiniY and 600 units of MiniX. The joint cost related to the operation was $3,000,000. MiniX sells for $3,500 per unit and MiniY sells for $3,800 per unit. Allocate the joint costs (production cost allocation) using the relative sales values of MiniY and MiniX. You hope you can prove that the MiniX is profitable, but you also recognize that numbers don’t lie!

Question 6: With the costs that you calculate, what is the profit or loss associated with MiniX?

Before starting your calculations, review the materials on integrating accounting and financial information.

Be sure to show your calculations in Excel and provide a narrative analysis. Your narrative analysis should summarize the results of your analysis and make recommendations for the benefit of the company.

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