# I-Asgn4 - LESSON 4 Assignment Question 1(20 marks Computer...

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LESSON 4 Assignment Question 1 (20 marks) Computer question Before you attempt this question, you should work through Computer illustration 4-1 in the Lesson Notes. “Wow! Is that B-10 model ever a loser! I say the time has come to cut back its production and shift our resources toward the new C-20 model,” said Rory Moncur, executive vice- president of Hammer Products, Inc. “Just look at this statement I’ve received from accounting. The C-20 is generating twice as much in profits as the B-10, and it has only about one-fifth as much in sales. I’m convinced that our future depends on the C-20.” The year-end statement to which Rory was referring follows: HAMMER PRODUCTS, INC. Income Statement Total Product Model B-10 C-20 Sales Cost of goods sold € 14,500,000 (9,000,000 ) €12,000,000 (7,200,000 ) €2,500,000 (1,800,000 ) Gross margin 5,500,000 4,800,000 700,000 Less: Selling and administrative expenses (4,900,000 ) (4,600,000 ) (300,000 ) Net income 600,000 200,000 400,000 Number of units produced and sold Net income per unit 60,000 €3,33 10,000 €40.00 “The numbers sure look that way,” replied Connie Collins, the company’s sales manager. “But why isn’t the competition more excited about the C-20? I know we have only been producing the model for three years, but I’m surprised that more of our competitors haven’t recognized what a cash cow it is.” “I think it’s our new automated plant,” replied Rory. “Now it takes only one direct labour-hour to produce a unit of the B-10 and one-and-a-half direct labour-hours to produce a unit of the C-20. That’s considerably less than it used to take us.” “I agree that automation is wonderful,” replied Connie. “I suppose that’s how we’re able to hold down the price of the C-20. Borst Company in Germany tried to bring out a C-20 but discovered they couldn’t touch our price. But Borst is killing us on the B-10 by undercutting our price with some of the best customers. I suppose they’ll pick up all of our B-10 business if we move out of that market. But who cares? We don’t even have to advertise the C-20; it just seems to sell itself.” Management Accounting Fundamentals Assignment 4 1

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“My only concern about automation is how our manufacturing overhead rate has shot up,” said Rory. “Our total manufacturing overhead cost is €3,600,000. That comes out to be a hefty amount per direct labour-hour, but Fred down in accounting has been using labour-hours as the base for computing overhead rates for years and doesn’t want to change. I don’t suppose it matters so long as costs get assigned to products.” “I’ve never understood that debit and credit stuff,” replied Connie. “But I think you’ve got a problem in production. I had lunch with Joanne yesterday and she complained about how complex the C-20 is to produce. Apparently, they have to do a lot of setups, special soldering, and other work on the C-20 just to keep production moving. And they have to inspect every single unit.” “It’ll have to wait,” said Rory. “I’m writing a proposal to the board of directors to phase out the B-10. We’ve got to bring our bottom line up or we’ll all be looking for jobs.”
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