Katy EH Manufacturing Company | ASSIGNMENT | Evaluation of Business Plans, Budgeting and Variance Analysis | | Algernon Jones | 05-Dec-15 |
Katy EH Manufacturing Company
This study was conducted to evaluate various business plans of Katy EH Manufacturing Company and their impact on profit before tax, preparation of budget as per selected option and investigation of variances of operating budget of year 2016.
Answer Part (a):
To decide whether product line Grill A be dropped or not by Katy EH we will calculate contribution margin from Grill A. If the contribution margin becomes zero then we will suggest dropping the said product line otherwise not depending on other non-financial factors.
Calculation of…show more content… The proposed change will be worthwhile if generates more contribution margin then existing contribution margin. Therefore, we will calculate contribution margin under both situations and then consider non-financial factors:
Particulars | Existing Budget | Proposed Change | | | $ | | $ | Revenue | 200,000 x 80 | 16,000,000 | 220,000 x 75 | 16,500,000 | Less: Relevant Cost: | | | | | Direct Material | 200,000 x 7 | 1,400,000 | 220,000 x 7 | 1,540,000 | Direct Labour | 200,000 x 4 | 800,000 | 220,000 x 4 | 880,000 | Supplies | 200,000 x 1 | 200,000 | 220,000 x 1 | 220,000 | Indirect Labour | 200,000 x 4 x 50% | 400,000 | 220,000 x 4 x 50% | 440,000 | Energy | 200,000 x 4 x 50% | 400,000 | 220,000 x 4 x 50% | 440,000 | Total Relevant Cost | | (3,200,000) | | (3,520,000) | Contribution Margin | | 12,800,000 | | 12,980,000 |
Contribution Analysis: | | $ | Contribution under existing situation | 12,800,000 | Contribution under proposed situation | 12,980,000 | Increase in Contribution | 180,000 |
Decision: Katy EH should lower