Accounting Case 3 (2)
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School
Wilfrid Laurier University *
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Course
BU127
Subject
Accounting
Date
Apr 3, 2024
Type
docx
Pages
3
Uploaded by BarristerHeat2011
Executive Summary
Question 1
The question asks to compute the plantwide overhead rate, and gross profit for each product at Unchained
Music (UM) and we found that their overhead rate is 4.20
, and the gross profit for each product is as follows: Jerry’s: $64,712.45, Layne’s: $145,798.22, Mike’s: $-43.126.85, Sean’s: $5,266.18
. With our calculations, we have identified Layne as the most profitable product while Mike’s is the least. Please see Appendix A
for the detailed income statement.
Question 2
The question asks to drop any unprofitable guitar from the product mix and to recalculate the overhead rate based on the new total direct labour hours. The product that we decided to drop was Mike’s as it generated a negative profit of $43,126.85. After dropping Mike’s, the plantwide overhead rate for UM resulted in 5.67
. Please see Appendix B
for the detailed adjustment. Question 3
The question asks to repeat the same process as Q2, and to eliminate any unprofitable products at each stage. We found that in the third stage, the product that was unprofitable was Sean
as it created a negative
profit of $22,659,27
, Please see Appendix C for the detailed adjustment. In the fourth stage of our adjustments, the product that turned unprofitable with a negative return of $20,529.30 was Jerry’s
. Please
see Appendix D
for the detailed adjustment. Question 4
The question asks for the main factors that would explain the company’s declining profitability and as well as what UM could do in order to address the specific issue. We found that the primary factor contributing to the decline in UM's profitability is the presence of unprofitable products within its product
line. To rectify this issue, UM should engage in a product line analysis and consider discontinuing the unprofitable products, starting with Mike's guitar. By doing so, UM can mitigate the negative impact on gross profit and strategically allocate direct labor hours to the more profitable guitars, such as Layne's, which yield positive gross profits. Concurrently, UM should continually reassess its pricing strategy and undertake cost reduction measures to enhance profitability in light of heightened market competition.
Appendix A
Appendix B
Appendix C
Appendix D
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