Premium Essay

Bridgetown Industry

In: Business and Management

Submitted By ashtya
Words 536
Pages 3
Recommendation –
In 1991, we expect Manifold to contribute $53,048 resulting in overall factory profit of $65,694 with gross margin of 28% and overhead allocation will be 549% of labor cost. On the other hand, if Manifold is discontinued, overall factory profit will decrease to $30,553, gross margin will reduce to 23% and overhead allocation will rise to 813% of labor cost. Based on above, Manifold product line should not be discontinued.
Analysis -
The current accounting data is incomplete as it’s does not provide breakdown of overhead into fixed and variable cost. To overcome this regression analysis was conducted on overhead items against direct labor and material. Regression analysis reveals that many overhead items have huge fixed costs, such as account 1000, 1500, 4000 and 14000. If Manifold is discontinued, these fixed costs will be shared by the remaining product lines increasing their costs. This will move these product line to Class 2 or 3, even though actual costs will not increase.
Next steps –
To further analyze the cost and profit of each product line, a breakdown of overhead accounts into fixed and variable cost as well as product wise allocation of overheads is required. This can be achieved by gathering the required data or improving the accounting system to capture fixed cost, variable cost and product wise allocation of overheads.
Assumptions - 1) As per the description, overhead items 1000, 1500, 5000, 9000, 12000, and 14000 are dependent on Direct Labor; and overhead items 2000, 3000, 4000, 8000, and 11000 are dependent on Direct Material. 2) Expected value of overhead (derived using regression) is a linear function of Direct Labor or Direct Material i.e no diminishing marginal effects. 3) The intercepts of regression equations represents fixed cost associated with that overhead and the slope of the equation represents...

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