Forrest Hill Paper Company

The company started off producing 20,000 units of mountain bikes. We did not change the production quantity. Last year our forecast sales were 24,000 when we only sold 19,866; therefore we thought it would be best to leave production at 20,000 bikes. Having excess inventory, we concluded that 20,000 units should be enough considering our quality has not changed and our advertising will not increase the sales dramatically. Although we had the choice to produce as much as 30,000 units, we felt as though we did not have sufficient money to increase production. We were interested in allocating the money towards marketing as opposed to production. We realized that without awareness, no matter how many units we make, sales would be inefficient.

If the company decided to sell the new product at price of D.Cr. 8.20, that means the full fixed expense of 1.20 is covered and the company will make high profit. However, the selling price of D.Cr. 8.20 is very high and under this price the company will sell the new product at a lower volume than what the company planned sale volume in the budget and that will affect the company in the market as a strong competitor in the food manufacturing. According to the case, the company sales volume drop to 30 tons when the product was sold at the price of D.Cr. 8.2. Thus, my recommendation are as follows:

Although the company did show an increased gross profit of $8,255,000 with $6,358,000 less Net Sales in 2013 versus 2012, that increase is due to the reduction in product Cost of Goods Sold by $14,613,000. Since increases in product price will negatively affect sales, one of management’s primary goals is to keep prices stable. This objective is achieved through implementation of cost cutting programs, investing in more efficient equipment, and automation of more steps in the production process.

While we are performing our analysis on different aspects of the company, we look at the three main types of cost. When we remain devoted to improving our costs, and the faults related, we show our same devotion to our consumers. This is portrayed by the quality of products we put on the shelves. Prevention costs, appraisal costs and Failure costs are areas

Discontinuing the steel ring production and start producing the plastic ring will allow Precision to enjoy immediately the huge contribution margin of 1,214.45$. This is possible because the sales price will remain relatively the same as the production cost decreases significantly. By comparing the old and the new contribution margin, there is an increase of 80%, which is a huge benefit for the company. Besides, even though Precision company is trying to base its strategy on the current steel inventory of over 390,000$, it should not affect the decision since it is a sunk cost. By introducing the plastic rings, it can solve the issue of the lost contribution margin by not producing and selling the steel rings. In fact, it can cover the lost contribution margin in a relatively short period. It is estimated that it would yield a profit of 738,500$.

3. Under the new activity-based costing (ABC) system, compute the indirect cost allocation rates for each of the three activities:

If the management of Drilling Innovations wishes to maintain a profit margin of thirty percent based on the ABC costs as opposed to the traditional cost method, they would need a raise the selling price of OS-367 to at least $19.65 (Edmonds, Tsay, & Olds, 2011). This would yield a gross profit of $4.95, $19.65 minus $13.75 equals $5.90, and a gross profit margin of thirty percent, $5.90 divided by $19.65 equals thirty percent (Edmonds, Tsay, & Olds, 2011). The target-selling price is obtained by dividing the unit cost, $13.75 by 1.0 minus the desired profit margin, $13.75 divided by .70 equals $19.65 (Edmonds, Tsay, & Olds,

Break even analysis can be used to decide whether to alter the existing product emphasis or not. For example in this case, if we refer last year’s data, we can see that the product C is not economically feasible to manufacture at $2.40 / unit. Following table gives the analysis for checking whether the company can afford to invest in additional “C” capacity.

Payback period is the time it takes to recoup your initial investment on a project based upon the future cash flows the project is expected to generate. In question one, the synthetic resin has a payback period of 2.50 years where as the epoxy resin has a payback period of 1.50 years, meaning the company will recoup its initial investment one year sooner with the epoxy resin than with the synthetic resin. If the company were determining which project to choose based solely on the payback period, it would choose the epoxy resin.

WMC’s accounting practices incorrectly attribute fixed manufacturing costs to the three Detroit groups in a proportional manner, leading to Group 3’s lack of profitability. Discontinuation of Group 3 pushes a greater percentage of the fixed costs to the other groups impacting their ability to be profitable. Additionally, WMC does not consider the degree to which production at the Detroit plant contributes to the operations and

Over the past two decade’s adoption of Activity-Based Costing ABC has been tossed around like a hot potato by every size and type of organization. It was adopted by organizations ranging in size from huge multi-national companies like General Motors to the much smaller Alexandria Hospital. (Lanen, Anderson, & Maher, 2011) Some companies began the initial processes but stopped short of actual implementation when they discovered more time and resources were needed to effect the change so management ran from it just

3. Activity-based costing system identifies the real nature of cost behavior and helps in reducing costs and identifying activities which do not add value to the product. In addition, it helps managers are able to control many fixed overhead costs by exercising more control over the activities which have caused these fixed overhead costs. This is possible since behavior of many fixed overhead costs in relation to activities now become more visible and clear.

Activity-based costing is a suitable and appropriate method for companies with multiple products or services who are having problem of inaccurate costing information and need to know which products are really profitable and which are the one that is making loss. For

I chose to write about activity based costing. I chose to write this paper because I wanted to know more about activity based costing and how it works. According to our text, activity based costing (ABC) has received a lot of attention since the 90’s. ABC has a lot of more details and can be more complicated than all the other costing methods, however it’s more accurate. “Costing systems are information systems. They require a specific type of information such as direct labour hours and units produced, to be of value. It is from the input data that product costs and other information are determined according to the specific costing system defined methodology. The results obtained would depend on the costing system used, since the same input data could be used in different ways. In this case the traditional costing system or an activity based costing system” (Marx.) A costing system should provide information to help minimize waste, but should not be wasteful in itself. In other words, the resources required to design, implement and maintain a costing system should be less than the benefit derived from the use of the system (Marx.)

Activity based costing (ABC) assigns processing overhead costs to products in a far more rational manner than the traditional methodology of simply allocating costs based on machine time. Activity based charging first assigns costs to the actions that will be the source of the overhead. After that it assigns the cost on those activities and then the merchandise that demand the actions.