At IPS you spend the first few years analyzing the industry, comparing your firm’s financial health to other firms in the industry and making sure that the financial statements are accurate. After a while you start exploring the other areas of accounting and finance work in the firm. You realize that accounting information is not only needed by external stakeholders for evaluating the firm, but also by management to judge the efficiency and optimality of operations. Your work expands to include Managerial Accounting.

“Congratulations!”

You have been promoted to the CFO position at IPS! You have hardly settled into your new office when the CEO asks you to prepare a financial report on the proposed Android01, as well as the MiniX and MiniY.

$2M has already been spent on market research, and IPS wishes to determine if the new Android01 component be produced in a way that will yield a profit.

“As you know,” the CEO says, “there are different ways of allocating fixed overhead costs and our choice will affect the cost-per-unit of Android01.” He continues, “I hope you can help us understand the different choices and how they’ll impact our business.”

Your prior manufacturing experience makes you think that examining an alternative method of assigning costs would also be prudent since Android01 shares component assembly with a related product — Processor01.

In your conversation with the IPS production manager, he alludes to the fact that a 30 percent markup is standard at IPS. While you’re at it, you look for information on the variable costs per unit for different levels of production so you can provide a recommendation on what level of output will maximize profit.

Thinking you’ve got everything covered, you decide to take a break. Just as your lunch arrives, you get a call from your CEO: “I almost forgot to ask you about the Mini line!”

The CEO continues, “The new MiniY product has been so successful that we would like to increase production. We will need a budget projection. Also, the shared production costs for the Mini line have affected the value of our premiere product, the MiniX — I would like you to provide me with a profit or loss figure for the MiniX as well.

As you scramble to take notes, she continues: “I’ll need a report summarizing your findings and projections.”

This project will require you to analyze operations costs for the organization using managerial finance techniques. You will next determine the level of production and prices that maximize the firm’s profit. Finally, you will prepare a financial budget for the firm and present your recommendations.

Begin by going to Step 1: Allocation of Costs.

You have been asked to look at production options for the Android01 since production methods and allocation of costs have implications for cost per unit. There are two alternative methods of production being considered. Begin by gathering data (using financial information in decision making), then answer various questions to determine the suitability of the project.

Production A

Costs are as follows:

• $4.5 million per year in rent for factory and machinery
• components and labor in the amount of $12 million will produce 300 units per year

Production B

In an alternative production method, the production of Android01 will share some production facilities and service divisions with Processor01. Fixed costs are $5 million per year, and are to be assigned at the rate of 30 percent to Android01 and 70 percent to Processor01.

The variable cost of the production facilities and service divisions is $20 million per year. The square footage of factory space and labor needed for the production of 500 units of Processor01 and 300 units of Android01 are listed below.

	Square Feet	Labor
Processor01 (500 units)	70,000	120
Android01 (300 units)	30,000	80

The remaining cost for the production of Android01 is for components, at $25,000 per unit.

Question 1: In Method B, what would be the cost per unit of producing Android01 using factory space as the allocation basis? What would be the cost per unit using labor as the allocation basis?

Before starting on your calculations, review materials on production cost allocation.

Submit your Allocation of Costs Report and Calculations to the dropbox below. Submit a spreadsheet showing your calculations in Excel and provide a narrative analysis in Word. Please note that narrative in this Project does not mean audio. It rather means a presentation of the results of your analysis using words and the important numbers. Your narrative analysis should summarize the results of your analysis and make recommendations for the benefit of company.

An alternate method of assigning costs is activity-based costing. The major activity for the production of both Processor01 and Android01 is component assembly. There will be a total of 125,000 assemblies per year for the production of 500 units of Processor01 and 300 units of Android01 at a total cost of $25 million. Each unit of Android01 will require 180 assemblies. The remaining cost for the production of Android01 is for components, at $25,000 per unit.

Review Section 4.1, Activity-Based Costing and Management and Section 4.2, Activity Based-Costing Method

Question 2: What would be the cost per unit of producing Android01 using activity-based costing?

Submit your Activity-Based Costing Report and Calculations to the dropbox below. Submit a spreadsheet showing your calculations in Excel and provide a narrative analysis in Word. Your narrative analysis should summarize the results of your analysis and make recommendations for the benefit of company.

Next, suppose IPS uses markup pricing for Android01. Fixed costs are $4.5 million, and for a level of production of 300 units, the variable cost per unit is $48,000.

Question 3: What is the price of the Android01 at 30 percent markup over full cost?

Submit your Markup Pricing Report and Calculations to the dropbox below. Submit a spreadsheet showing your calculations in Excel and provide a narrative analysis in Word. Your narrative analysis should summarize the results of your analysis and make recommendations for the benefit of company.

When you have submitted your Allocation of Costs Report, Activity-Based Costing Report, and Markup Pricing Report, continue to the next step, whewre you will assess the profit-maximizing output level, prepare a production cost budget, and produce a Profit or Loss Report.

Before you submit your assignment, review the competencies below, which your instructor will use to evaluate your work. A good practice would be to use each competency as a self-check to confirm you have incorporated all of them in your work.

• 3.1 Identify numerical or mathematical information that is relevant in a problem or situation.
• 3.2 Employ mathematical or statistical operations and data analysis techniques to arrive at a correct or optimal solution.
• 3.3 Analyze mathematical or statistical information, or the results of quantitative inquiry and manipulation of data.
• 3.4 Employ software applications and analytic tools to analyze, visualize, and present data to inform decision-making.
• 10.5 Develop operating forecasts and budgets and apply managerial accounting techniques to support strategic decisions.

Submission for Allocation Bases, Activity Based Costing and Markup Pricing

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