Having impressed Frank Chan with your analysis of product costs and activity-based costing, you have now been invited to attend the department managers meeting of the Electronics Division of LifeSung Corporation. “We need you there to help provide us with more information regarding some decisions we need to make,” said Frank when he invited to you to the meeting.
In the meeting room, multiple discussions were going on.
James Cook (Sales Director): “We can’t just sell “as many as you can”. You need to tell us how many we need to sell. My sales people need to have a target of each of the PCB boards that they have to sell. Otherwise, they would just sell the ones that are easier to sell. Numbers may add up but can the department make what they are supposed to make in terms of sales dollars?”
Gemma Watts (Finance Manager): “Look, James. We have always set your department a target. It’s up to your department to meet that target. We have no idea how many of each type you need to sell. Our job is to tell you how much revenue needs to be generated from the sales of the boards. And we have what you need to achieve right here. How many of each type you need to sell is really not the concern of the Finance Department.”
Thomas Chen (Plasma Department): “Before you even talk about your sales requirements, we need to look at the costs of our Plasma panels. According to Gemma’s report, Plasma B is not really doing well. It is dragging down the performance of the whole department. And if my department is not performing, then the whole division suffers as well. I am suggesting that we drop Plasma B. That way, we won’t be losing any more money.”
Alex Hu (Microcontroller Department): “Look you all. My issue is even more pressing. I need a decision now. We have been discussing it for too long. Are we going to buy the new machine or not? Or should we just outsource the production of controller 457? I need to let my workers know whether they have a job or not!”
Referring to you, Frank Chan said, “Hey guys, our new accountant here did a marvellous report on product costing for us. With enough information from each of you, I am sure a report can be prepared that will enable us to discuss this in a more genteel manner.” Turning to you, Frank continued, “Could you prepare us this report, in say, one week?”
Stanley Cobb (Managing Director, Electronics Division): “I think that’s a great idea. Let’s meet back in a week.”
Having prepared the original product costs and activity-based costs for the PCB department, you know that there are three main circuit boards that make up the bulk of the department’s sales. Based on your previous report, Frank had implemented the changes that you have recommended. The selling price for Advanced, Boosted and Custom were $222.00, $540.00 and $732.00 respectively. Costs for the circuit boards were $185.00, $450.00 and $610.00 respectively. Having implemented the changes, the market for PCBs has stabilised and sales have been consistent for the last couple of months. The sales mix has been consistent at 60% : 30% : 10% for Advanced, Boosted and Custom respectively. You establish from Frank that fixed costs per month for the PCB department are $65,000. This amount was derived by dividing the annual fixed cost by 12. James Cook had informed you that the sales department had to make $2,800,000 from PCB sales for the coming year. When you had asked, “Before or after-tax?” the reply from James was, “I’m sure you can work it out, genius!”
You then went to see Thomas Chen. “Have a look at this report for the last quarter. I really think we should just shut down Plasma B.”
You have also gathered the following information:
- Fixed wages – Traced refers to the wages for the four employees in the Plasma department. The four employees will no longer be required if Plasma B is closed.
- Fixed overhead – Traced refers to the overhead of the Plasma B and will be reduced by 50% if Plasma B is closed.
- Corporate overhead and Divisional overhead remains unaffected by the closure. These overheads will be re-distributed amongst all existing departments in the Electronics Division.
- If Plasma B is closed, there will be no impact on the sales of Plasma A.
Having got the information necessary from Thomas, you then proceeded to see Alex Hu. “My department is already running the machines at full capacity. Controller 457 is a new product, which we currently do not have any expertise in producing. However, we can train some of the current employees to produce them. If we do decide to produce them, then a new machine is required. As you can see, this report shows that, for the units that we require, it would cost us $100.50 per unit. APG Technology has agreed to supply us what we need for $68.00 per unit. I really think that we should just let APG do the job for us. This is the report that my engineers have produced,” said Alex.
Other information that you derived from Alex:
- The report is for a quarter, where 10,000 units of controller 457 are required. This requirement is expected to remain constant for the foreseeable future.
- Depreciation has been calculated on the basis of a five year useful life, using straight-line depreciation, and dividing that into quarters.
- Overhead has been applied to products on the basis of labour cost:
- Controller 457 is expected to become the mainstay of the Microcontroller Department in years to come.
Confident that you now have the required information, you proceed to prepare the report that Frank Chan and Stanley Cobb has asked for.
Prepare a report for the managers meeting that discusses the following:
A. How many units each of Advanced, Boosted and Custom are required to be sold in order for James Cook to meet his target? Explain the importance of tax on the calculation of the number of units required to be sold to earn that profit. What are the assumptions to be made for CVP analysis?
B. Should Plasma B be closed? Explain why or why not.
C. Should the Microcontroller Department accept the offer from APG Technology or should they buy their own machine and produce controller 457 themselves?