Interiors by Louise

Scenario 1:

Part 1:

Activity based customer cost report
Particulars	Architectural business Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Total	Window-treatment business	Total
Adams	Betz	Chatham	Dedham	Elm
Direct costs	1,47,000	1,17,200	2,64,200	2,18,400	1,15,720	57,040	3,91,160
Overhead cost
– Directly attributable	47,099	38,001	85,100	84,127	34,802	17,231	1,36,160
– Remaining (allocated on the basis on revenue)	27,845	22,466	50,311	42,526	17,592	8,710	68,829
Customer discount	23,400	–	23,400	–	–	–	–
Cash payment discount	–	–	–	–	–	3,660	3,660
Total	2,45,344	1,77,667	4,23,011	3,45,054	1,68,114	86,642	5,99,809

Directly attributable overhead:

• Architectural business= 340400*25%= $85100
• Allocated to Adams= 851000/(234000+188800)*234000= $47099
• Allocated to Betz= 851000/(234000+188800)*188800= $38001
• Window treatment business= 340400*40%= $136160
• Allocated to Chatham= 136160/(357380+147840+73200)*357380= $84127
• Allocated to Dedham= 136160/(357380+147840+73200)*147840= $34802
• Allocated to Elm=136160/(357380+147840+73200)*73200= $17231

Other remaining overhead = 340400-85100-136160= $119140

• Architectural Business= 119140/(422800+578420)*422800= $50311
• Allocated to Adams= 50311/(234000+188800)*234000= $27845
• Allocated to Betz= 50311/(234000+188800)*188800= $22466
• Window treatment business= 119140/(422800+578420)*578420= 68829
• Allocated to Chatham= 68829/(357380+147840+73200)*357380= $42526
• Allocated to Dedham= 68829/(357380+147840+73200)*147840= $17592
• Allocated to Elm=68829/(357380+147840+73200)*73200= $8710

Customer discount = 234000*10%=23400

Cash Payment Discount= 73200*5%=3660

Distribution channel cost report
Particulars	Architectural business	Window-treatment business
Direct costs	2,64,200	3,91,160
Overhead cost
– Directly attributable	85,100	1,36,160
– Remaining (allocated on the basis on revenue)	50,311	68,829
Customer discount	23,400	–
Cash payment discount	–	3,660
Total	4,23,011	5,99,809

Note- We has assumed that the discounts offered are not included in the overhead cost and that they are charged on the gross revenue.

Customer Profitability analysis
Particulars	Architectural business	Total	Window-treatment business	Total
Adams	Betz	Chatham	Dedham	Elm
Gross revenue	2,34,000	1,88,800	4,22,800	3,57,380	1,47,840	73,200	5,78,420
Less:
Direct costs	1,47,000	1,17,200	2,64,200	2,18,400	1,15,720	57,040	3,91,160
Overhead cost
– Directly attributable	47,099	38,001	85,100	84,127	34,802	17,231	1,36,160
– Remaining (allocated on the basis on revenue)	27,845	22,466	50,311	42,526	17,592	8,710	68,829
Customer discount	23,400	–	23,400	–	–	–	–
Cash payment discount	–	–	–	–	–	3,660	3,660
Profit*	-11,344	11,133	-211	12,326	-20,274	-13,442	-21,389

Profit = Gross Revenue – All expenses

Profit for Adams= 234000-147000-47099-27845-23400 = $ (11344)

Profit for Betz= 188800-117200-38001-22466= $11133

Profit for Chatham= 357380-218400-84127-42526= $12326

Profit for Dedham= 147840-115720-34802-17592= $(20274)

Profit for Elm= 73200-57040-17231-8710-3660= $(21389)

Overall Profit Analysis
Particulars	Architectural business	Window-treatment business	Total
Gross revenue	4,22,800	5,78,420	10,01,220
Less:
Direct costs	2,64,200	3,91,160	6,55,360
Overhead cost
– Directly attributable	85,100	1,36,160	2,21,260
– Remaining (allocated on the basis on revenue)	50,311	68,829	1,19,140
Customer discount	23,400	–	23,400
Cash payment discount	–	3,660	3,660
Profit	-211	-21,389	-21,600

Profit from Architectural Business = 422800-264200-85100-50311-23400= $(211)

Profit from Window treatment business= 578420-391160-136160-68829-3660= $(21389)

Introduction

We have been provided with the financial data of Interiors by Louise. Louise is the proprietor who needs financial analysis of her existing business. It is important that financial data be analysed time to time, so that profitability of a business can be analysed. Studying the cost and revenue of the business helps us to plan the operations which assist in cost minimisation and profit maximisation. We have calculated the costs and profits of various clients and division of profession of Louise which will help us have an understanding of the profitability.

Analysis of activity based cost report

In order to arrive at the total calculation for each of the clients division, we have added the direct cost attributed solely to the client along with the overheads which have been allocated based on the gross revenue. Also, we have also calculated marketing cost separately which has  been included in this analysis.

From the calculation above we see that the cost allocated to Adams and Betz is 105% and 94% respectively of the gross revenues. The total cost allocated to Chatham, Dedham and Elm is 97%, 114% and 118% respectively. The business in which Louise is involved is more of a consulting business. The costs incurred in this type of business are considerably lower than any other bunnies as it requires personal expertise and not much tangible material. The cost incurred by each client is too high as compared to the revenue earned. The cost is more than revenue from the clients Adam, Dedham and Elm. Therefore steps are required to be taken in order to reduce the cost and increase profit.

Analysis of Customer Profitability

The revenues earned from each of the clients are netted off with the total expense charged to them in order to arrive at the profitability of each customer.

From the above calculations we can see that that the owner is incurring losses from its clients Adams, Dedham and Elm. There are profits earned from Bets and Chatham, but the rate of profit earned is very low. Overall the profitability of the company at client level is not very good. Step need to taken in order to ensure high returns from all the clients.

Semiconductor Division

Analysis of distribution channel Profitability

The distribution channel profitability report consist details on the two channels of Louise’s business – Architectural business and window treatment business. Various costs incurred on various clients under each channel have been summed up in order to calculate the cost incurred for each channel; same has been done with the revenues.

We see that cost incurred under architectural business is $423,011 and hat for window treatment business is $ 599809. Costs under both channels are very high.  The expense of discount provided to the client for architectural bunnies is very high. Other ways in order to attract customer should be opted for. Overall profitably of the channels is negative, netting of the profits and losses of various clients under each channel has resulted in overall loss for each channel. The architectural business has a loss of $211 and the window treatment channel has a loss of $21389.

Analysis of the total profitability

Since both the channels of the business have been incurring losses, the overall profitability of the company is also negative. Due to high direct and over head cost along with high discount expenses and low revenues the company has incurred loss at an overall level.

Recommendation and conclusion

We have conducted the analysis of financial data of the company at all levels- client, channel and overall. We can see that there are only two clients who have provided positive returns. But the rate of these returns has been very low. In order to improve the profitability of the business, Louise should try to acquire more clients. In order to attract the client they can provide introductory discount rates. But the discount rates should be planned in such a way so that the business does not suffer, like it has been currently. Also, the revenue should be increased so that they can meet with the high cost. Therefore, in order to ensure success of the business it is important that the financials are taken care of.

Scenario 2:

Part 1:

We have calculated the contribution earned per hour for Super-chip and okay- chip. We have first calculated normal contribution per unit, and then divided the number of hours consumed in order arrive at contribution earned for each hour:

Statement of contribution margin per hour
Particulars	Super chip	Okay Chip
Selling Price	80	26
Less:
Direct Material	5	2
Direct Labour	60	20
Contribution per unit (a)	15	4
Total hour per unit (b)	3	1
Contribution per hour (a/b)	5	4

Since, contribution earned per hour is more for super chip, we will first allocated the limited resource, the hours to the production of super chip, and the remaining hours will be used for production for Okay chip-

Calculation of hours allocation
Total Hours	45,000
Less:
Hours taken to produce 15000 super chips (15000*3)	45,000
Remaining hours	–

Process Control Division

Therefore, since no hours are left for production of okay chip, only 15000 units of super chip will be produced

The process control division wants to transfer the super chips form the in house production department for 5000 units. In order to produce 5000 units of process control unit, 5000 units for super chip will be required. In order to produce 5000 units of super chip the semi conductor division would require 5000*3= 15000 hours.

Since, total hours allocated to the semi conductor division id only 45000 hours, which is already being used for production, there are no spare hours available to be used for production of super chips for process control division. Therefore, the super chips cannot be transferred for production of process control unit.

Part 3:

It should consider using super chip for production if the transfer price of such chip is lower than the purchase price. Therefore we have calculated the transfer price of the super chip:

Calculation of transfer price- Super-Chip
Direct material cost of 5000 units (5000*5)	25,000
Manufacturing labour cost for 5000 units (5000*3*20)	3,00,000
Total Cost	3,25,000
Add: Contribution lost on 5000 units (5000*15)	75,000
Total transfer price	4,00,000
Transfer price per unit	80

In the calculation above we have assumed that the order of 15000 units for semi conductors can partially be rejected.

The purchase price of the material for market is $70 per unit, whereas the transfer price is $80 per unit. Since the transfer price if more than purchase price, we would recommend the process control division to purchase the circuit board form the market at lower rate.

Part 4:

Following is table of hour’s allocation if the semi conductor division had 60000 units.

Calculation of hours allocation
Total Hours	60,000
Less:
Hours taken to produce 15000 super chips (15000*3)	45,000
Remaining hours	15,000
Hours required to produce 5000 units of super chips	15,000

If the semi conductor division had 60000 hours then it could produce super chip for the other department. But we would still recommend the process control division to buy the circuit from the market as it would be cheaper for them.

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