Why some production costs are variable and some are fixed

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Reference no: EM133615712

Homework: Product Pricing Recommendation

Competencies

By successfully completing this homework, you will demonstrate your proficiency in the following course competencies:

I. Competency I: Explain how accounting concepts and practices impact financial reporting.

1. Explain why some production costs are variable and some are fixed.

II. Competency II: Apply principles of accounting to assess financial performance.

1. Analyze how financial accounting of production cost differs from managerial accounting of production cost.

III. Competency III: Analyze accounting information to support business decisions.

1. Analyze the benefit of recalculating the cost of pickle production.
2. Recommend a plan of action to management.

IV. Competency IV: Communicate financial information with multiple stakeholders.

1. Communicate accounting information clearly.

Create a 9-slide presentation in which you analyze cost accounting practices to make a recommendation about whether or not to accept a purchase offer at a lower price than normal. You may either record the presentation or write a 2 to 3 page supporting report.

Introduction

This portfolio work project will help you to assess a request, complete an analysis to understand the impact on an organization, provide a recommendation, and communicate that recommendation.

Scenario

The Acme Pickle Company has distributed pickles under the "Florida's Best" brand for eight years from its production facility in Jacksonville, Florida. It sells the pickles to stores in the southeastern United States. Acme normally produces between 8,000 and 10,000 cases of pickles a month but has the capacity to produce 12,000 cases without adding equipment or personnel.

The owner of a twenty-store supermarket chain in Wisconsin, called Super Deals, visits friends in Florida and is impressed with the quality of "Florida's Best" pickles. He approaches you, an Acme Pickle account manager, with an offer to buy 2,000 cases of pickles to use in a special promotion at his stores. He is thinking of something such as:

"Free jar of Florida's Best pickles with every purchase of forty dollars or more-this month only!"

He offers Acme a price of $9.50 per case, knowing that it is a very substantial discount from the normal selling price of $20 a case. Acme's management is inclined to turn the offer down, because their cost is calculated at $10.00 a case. They believe they would lose money if they sold at $9.50 a case. You, on the other hand, believe that some errors have been made in the cost accounting.

Your Role

You are the account manager for Acme Pickles.

Task

Your analysis for the Controller and Sales Manager is needed to suggest a different way of calculating the pricing of the pickles that may be lower. As part of your analysis, address the following items:

I. Explain why some production costs are variable and some are fixed.

II. Analyze the benefit of recalculating the cost of pickle production.

1. How would you recalculate it?
2. What would the result be?
3. What is the benefit to the company of recalculating the cost?

III. Analyze how financial accounting of production cost differs from managerial accounting of production cost.

1. Explain the difference between the two accounting methods.
2. Identify the benefits and drawbacks of each method.

IV. Recommend a plan of action to management regarding Super Deals' offer.

Below is the cost report for a recent month. In this month, Acme produced 9,000 cases and sold them at $20 per case, which is Acme's normal selling price. Nine thousand cases are well beyond Acme's break-even point, enabling Acme to record a substantial profit at the nine-thousand-case level.

Acme Pickle Company Cost ReportItemCostCucumbers$15,000Spices and vinegar11,000Jars and lids10,000Direct labor, paid by the case30,000Line supervisors, on salary10,000Depreciation on factory10,000Property taxes on factory3,000Insurance on factory1,000Total Costs:$90,000Cost per case (9,000 cases produced) $10.00

Reference no: EM133615712

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