Cost Accounting I: Seminar 2 1. Make or buy Shiny Plastic produces and delivers CD cases which are subsequently sold to Sony, Shiny Plastic’s unique client. In 2015 the firm obtained results that were far below their forecasts. Therefore, for the year 2016, the CEO is evaluating various possibilities for improving the firm’s results. On the one hand, the firm can continue producing CD cases, as it was doing until now, and focus on improving distribution. On the other hand, it can stop producing the CD cases (thus eliminating fixed costs), and buy the finished product from an external supplier. The two alternatives are illustrated by the following table: a) If Shiny Plastic forecasts selling 2,500,000 CD cases, which is the best alternative, produce or buy?  Total costs producing at home: o TC Home = FC + UVC*Q = 60000 + 0.048*2500000 = 180000  Total costs buying from supplier: o TC from Supplier = UVC1*2000000 + UVC2*500000 = 0.078*2000000 + 0.04*2000000 = 156000 + 80000 = 236000 b) If the sales volume is uncertain due to instabilities in the music market, between which intervals of units sold will Shiny Plastic decide to produce, and between which intervals will it decide that selling is more profitable? Show graphically.  60000 + 0.048Q = 0.078Q -> Q = 2000000 o The firm will always prefer to buy the finished product from the supplier except when the quantity is 2000000 units in which case the firm is indifferent. 2. CVP Analysis, Income Taxes The Express Banquet has two restaurants that are open 24 hours a day. Fixed costs for the two restaurants together total $450000 per year. Service varies from a cup of coffee to full meals. The average sales check per customer is $8,00. The average cost of food and other variable costs for each customer is $3.20. The income tax rate is 30%. Target net income is $105,000. a) Compute the revenues needed to earn the target net income. 1) Considering the data, first we obtain the operating income taking into account the income tax rate and the target net income: o OI = Net Income/(1-Tax rate) = 105000/0.7 = 150000. 2) To calculate the contribution margin, we sum the OI to the FC: o CM = OI + FC = 600000 3) To calculate the revenues, we take into account the Variable Costs percentage to sales: o VC% = UVC / Sales = 3.2 / 8 = 0.4 = 40% 4) To compute the final sales then: o Sales = OI / (1- VC%) = 600000 / 0.6 = 1000000 b) How many customers are needed to break even? (UCM * Q – FC) * (1- t) = 0 ((8-3.2) * Q – 450000) * 0.7 = 0 Q = 93750 And to earn net income of $105,000? ((8-3.2) * Q – 450000) * 0.7 = 105000 Q = 125000 c) Compute Net income if the number of customers is 150,000. NI = (UCM * Q – FC) * (1- t) NI = ((8-3.2) * 150000 – 450000) * 0.7 NI = 189000 3. Software Development Company This software development company’s business revolves around the sales of software programs for small companies. The company has the objective of attending the most important technology fair in the country. There is the possibility of buying software programs to then sell them to a big wholesaler at the fair for a buying price of $60 per program. The company already negotiated with the software programs provider the possibility of returning the products not sold for a penalty equal to 0.5% of the costs. The selling price of these programs is $180. The cost of attending the fair is of $2000 including rent, logistics and advertising costs. FC = 2000, USP = 180, UVC = 60, Penalty for products not sold = 0.5%, UCM = 120 a) What would be the company’s income if they sell: 0,1,5,20 or 50 software programs? o Q = 0 -> NI = 120 * 0 – 2000 = -2000 o Q = 1 -> NI = 120 * 1 – 2000 = -1780 o Q = 20 -> NI = 120 * 20 – 2000 = 400 o Q = 50 -> NI = 120 * 50 – 2000 = 4000 b) How many software programs does the company need to sell to be able to cover the costs? o 0 = 120 * Q – 2000 -> Q = 2000 / 120 -> Q = 16.67 -> 17 programs c) How many software programs does the company need to sell to have an income of $1,200? o 1200 = 120 * Q – 2000 -> Q = 27 programs d) How many software programs does the company need to sell to have an income of $1,200 taking into account an income tax of 25%? o NI = 1200 / 0.75 = 1600 o 1600 = 120 * Q – 2000 -> Q = 30 e) How many software programs does the company need to sell to have an income of $1,200? o 1200 = 120 * Q – 2000 -> Q = 27 programs f) Suppose that the company forecasts to sell 40 software programs, but they have the opportunity of being published in a top tech journal which would be a great advertising boost for the company at a cost of $500. Management thinks that this advertising strategy would boost the sales of software programs to 45 units. Would this strategy be beneficial for the company? o 120 * 5 extra units = 600, but we have to subtract 500 from the advertising costs. Then 600 – 500 = 100. It is beneficial. g) The company decided to not undertake the costs of a new advertising campaign, but rather decrease the selling price of each software program to $150. Do you think that with this price reduction the company will be able to sell 50 software programs? If we decrease the price, we will have a decrease in the UCM, having less profits, but also we will have an increase in demand because of that reduction… However, we cannot predict by what amount it is going to boost the sales. h) How many software programs does the company need to sell if the fair price of attendance rises to $3000? (Assume the selling price per each software program is $200 and the variable cost –buying price- per software program is $60) o Q = FC/(USP-UVC) = 3,000/(200-60) = 21.44, then 22 programs.