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Profitability & Reporting Assignment

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Introduction

Profitability & Reporting Assignment Task 1a) From referring to and using the memo from Bob Harris and the figures in Appendix 1, I will be calculating the total profit. Appendix 1 is illustrated below. Division 1 2 3 4 Product P1 P2 P3 P4 Volume 7,000 6,500 10,000 8,000 S.P per unit (�) 11.00 10.00 10.50 12.00 Turnover 77,000 65,000 105,000 96,000 Materials 28,000 19,500 45,000 40,000 Labour 21,000 16,250 12,500 40,000 Other Costs Apportioned Central Overheads Personnel 10,000 8,000 7,000 10,000 Finance 5,000 6,000 6,000 7,000 Administration 4,000 4,000 6,000 6,000 TOTAL EXPENSES 68,000 53,750 76,500 103,000 PROFIT/LOSS 9,000 11,250 28,500 -7,000 Total Profit = Sum of Product 1 Profit + Sum of Product 2 Profit + Sum of Product 3 Profit + Sum of Product 4 Profit = �9,000 + �11,250 + �28,500 + �-7000 = �41, 750. Task 1b) The Saved Costs are going to be the Variable Costs. The Variable Costs from using the table above are Labour (�40,000) & Materials (�40,000). Labour costs will be saved because if division 4 was to close then Spark Ltd will not need any labour to manufacture product 4 and so no funds will need to be spent on purchasing materials to fabricate that respective product in that particular department. Subsequently, the company will save �80,000. This was determined by adding up the VC's and then deducting it from the table. The Incurred Costs which are still going to take place are the Fixed Costs. Fixed costs are those costs which remain congruent regardless of changes in the level of activity. In the case of Spark Ltd the fixed elements of costs can be identified as being Administration (�6,000), Finance (�7,000) and Personnel (�10,000). By totalling up these fixed costs it is evident that the company are going to incur �23,000. Task 1c) Based on my cost analysis in the previous question, I will now establish the change in total profit if division 4 was to close. ...read more.

Middle

To workout the profit/loss at any given point on the graph, all we have to do is measure the gap between the sales revenue and total costs at a chosen number of units, and read the amounts off the "y" axis. To test whether this method works, I will now take any two given points of both profit and loss on the chart and read the figures on the graph for those two specified points and see if they tally with my data. The rationale to calculate a certain level of profit or loss is mentioned below. In relation, these two given points are emphasised on a segregated graph in Appendix 1. The Point of Operating Profit that I have chosen to test is 35,000 units. For example, at an operating profit of 35,000 units, the profit "gap" is �110,000. This was calculated by at first looking at the maximum level of production scheduled for the first year (35,000 units), then going up to the point on the break-even chart until you reach the sales revenue figure of �770,000. Having once pinpointed the sales revenue figure, I then went down directly until I found the point of the total costs figure for 35,000 units which was �660,000. In turn, all I did was subtract the sales revenue figure of �770,000 away from the total costs of �660,000. This as a result gave me an operating profit figure of �110,000. The Selected Point at which Spark Ltd encounters a Loss and to which I have elected to use as an example is 10,000 units At an operating loss of 20,000 units, the loss "gap" is �40,000. In other words, at this point on the break-even chart, Spark Ltd encounters a deficit of �40,000 before they achieve break-even. Using the above example as a basis from which to work the loss out, all I did was simply go across the y axis until I identified 20,000 units. ...read more.

Conclusion

The method I used to verify the contribution per unit per kg was Contribution Per Unit/kg Per Unit. To obtain how much each division's products costs in terms of materials per 1 unit I referred to Appendix 1. Contribution Per Unit Per Kg Division 1 = �4.00 Contribution Per Unit/ 2kg = �2.00 per kg (Ranked 3) Division 2 = �4.50 Contribution Per Unit/1.5kg = �3.00 per kg (Ranked 1) Division 3 = �4.75 Contribution Per Unit/ 2.25kg = �2.1 per kg (Ranked 2) Division 4 = �2.00 Contribution Per Unit/ 2.5kg = 80p per kg (Ranked 4) As a direct consequence of finding out how much it costs each division in terms of contribution per unit per kg, I have now ranked each product according to which one contributes the most for Spark Ltd. If we consider the limiting factor, product 2 would be the most suited for Spark Ltd simply because it contributes/produces the most per unit, per kg. Revised Production Schedule As mentioned on the preceding page, I will now produce a revised production schedule for Spark Ltd. In order to make a final decision as to which product would be the most suitable, I will have to bear in mind the volume of each separate product that each division intends to produce because in the fax from Heather Bull, she specifically stresses that the firm will not be able to accommodate for any more than 50,000kg of materials. To calculate how much kg in terms of materials each separate product provides, I will have to multiply the expected volume of each product with the materials per 1 unit. Therefore, the revised production schedule will take the shape of something like: Product 2 = 6,500 x 1.5kg = 9,750kg Product 3 = 10,000 x 2.25kg = 22,500kg Product 1 = 7,000 x 2kg = 14,000kg Product 4 = 1500 x 2.5kg = 3,750kg Amish Patel PAR Upal Banerjeee ...read more.

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