Katy Eh Manufactoring Company Essay

1564 words - 7 pages

Katy EH Manufacturing Company |
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 ...view middle of the document...

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 |

Katy EH should lower the price of Grill C to $ 75 for increase in sales by 20,000 units because it will cause an increase in contribution by $ 180,000 and EH will compete in market and more market share. However, the impact on profit before tax is negative by $ 100,000 (Solution part-e)

Answer Part (c)

Contribution of 10,000 Units of Grill C | |
Revenue | 10,000 x 80 | $ 800,000 |
Less: Relevant Cost: | | |
Direct Material | 10,000 x 7 | 70,000 |
Direct Labour | 10,000 x 4 | 40,000 |
Supplies | 10,000 x 1 | 10,000 |
Indirect Labour | 10,000 x 4 x 50% | 20,000 |
Energy | 10,000 x 4 x 50% | 20,000 |
Total Relevant Cost | | (160,000) |
Contribution Margin |   | 640,000 |
| | |
Contribution of 10,000 Units of Grill A | |
Revenue | 10,000 x 150 | $ 1,500,000 |
Less: Relevant Cost: | | |
Direct Material | 10000 x 17 | 170,000 |
Direct Labour | 10000 x 21 | 210,000 |
Supplies | 10000 x 7 | 70,000 |
Indirect Labour | 10000 x 10 x 50% | 50,000 |
Energy | 10000 x 12 x 50% | 20,000 |
| | (520,000) |
Contribution Margin |   | 980,000 |
| | |
Contribution Analysis: | | $ |
Increase in contribution by 10,000 units of Grill C | 640,000 |
Decrease in contribution of 10,000 units of Grill A | (980,000) |
Net Loss in contribution |   | (340,000) |

This option is not worthwhile because it reduces the contribution by $ 340,000 and the...

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