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Project DR: Manufacturing Division

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Project DR: Manufacturing Division Anita Maikaprophit (owner and CEO) and Maurice "Mo" Moni (President) of Diversified Resources (DR) enlisted the help of Learning Team A (LTA) to evaluate the Manufacturing division and its products. This analysis would include giving recommendations for growth, as well as provide focus for the future. This project entailed four milestones, all of which provide a framework for the company's analysis, and a basis for the recommendations to senior management detailed in the conclusion section of this report. The financial details for the analysis are shown in the attached spreadsheet exhibits. Company Overview Diversified Resources (DR) initial start of the business focused on providing Tax Tables and Technical Bulletins to customers through its Customer Research (CR) division. In later years, with new owners and management, the company reorganized into three divisions: Manufacturing, Services, and Merchandising. The company began to offer a significant amount of training courses, which focused on basic Cost Accounting and Bookkeeping Practices. The training was so successful, that DR began to sell Audio Taped Sessions of its courses and Videotaped Training Sessions. This led to the possibility of offering Consulting Services on specific issues. Continued student observance led to embossed notepads, private-label accounting wear, which is now known as the Action Accounting Wear Line. The line consists of T-shirts; sweat shirts, and leisure suits. They are distributed at all seminars, available through the catalogue or via the company's website. With an expanded view of Mr. Moni's operational vision, the Manufacturing division now has six departments. They are three direct, Assembly, Quality, and Packaging; and three indirect, Support, Services, and Merchandising. The division produces three custom accessories, in-house, that are sold to customers. They consist of the Pocket Pal, the Accruer, and the Quik Calc. Here is a description of each: 1) Pocket Pal -- A pocket protector made of high-density polyethylene plastic. It is molded to fit into most shirt pockets. ...read more.


It only makes since that DR would find ways to decrease variable costs as income decreases from an average of 38% to 10%. The following charts show the breakeven point with a 10% ROS for each product using the current costing system. Diversified Resources estimated Return-On-Sales (ROS) Commodity Income BE Calc Sales ROS Pocket Pal $49,736.89 $497,368.94 10% Accruer $60,392.16 $603,921.63 10% Quik Calc $267,764.12 $2,677,641.24 10% Averages: $125,964.39 $1,259,643.94 10% Desired Income % 10% % of Sales 10% Note: Changing the Desired Income % figure to 10%, yields the equations shown above. Variable costs are automatically assumed to decrease, with decreased sales in order to achieve a 10% ROS. Proof Pocket Pal Break Even Calculated Sales $ 497,368.94 Variable Cost $ 199,812.57 Contribution Margin $ 297,556.37 Fixed Costs $ 247,819.48 Income $ 49,736.89 % of Sales 10% Desired Income % 10% Proof Accruer Break Even Calculated Sales $ 603,921.63 Variable Cost $ 177,187.62 Contribution Margin $ 426,734.00 Fixed Costs $ 366,341.84 Income $ 60,392.16 % of Sales 10% Desired Income % 10% Proof Quik Calc Break Even Calculated Sales $ 2,677,641.24 Variable Cost $ 1,296,485.25 Contribution Margin $ 1,381,155.99 Fixed Costs $ 1,113,391.87 Income $ 267,764.12 % of Sales 10% Desired Income % 10% Costing Drivers: LTA developed a working definition of cost driver to state the driver includes an event, task, activity, or volume that drives a corresponding cost. Further, the cost driver of variable costs is the level of activity or volume whose change causes the variable costs to change proportionately (Horngren et al., 2000). As stated in the previous memo, the manufacturing department of Diversified Resources has concluded to use the activity based cost (ABC) management system because this system more accurately traces indirect costs to activities, identifies activity cost drivers, and allocates costs to orders, products and customers. Identifying activity cost drivers for this project was a discussion that allowed LTA to identify several drivers and compare / contrast the alternatives. ...read more.


This assumption is based upon the exceeded projected selling amount, and the price for which it was sold. The standard cost of this item compared to the selling price is in good proportion. Twenty five percent of the selling price is standard cost. The financial outlook for the product appears to be promising. In conclusion, management may want to look at ways to increase consumer awareness about the Accruer. Since there are no cost issues, the increased marketing effort should increase the selling of this product. Quik Calc The Quik Calc product line represents 61% of the total revenues earned in the Manufacturing Division. However the Quik Calc's actual operating income is lower than the budgeted operating income by some $95,374. Why is this happening? There are a couple possibilities. First, the projected number of Quik Calc's being sold was less than expected. Was the selling price too low? Are too many costs being allocated? These are just a few questions that DR should be asking themselves in order to make the Quik Calc line more profitable. The biggest problem seems to be in the costing of the Quik Calc product line. Diversified budgeted a total standard unit cost of $2.64, but the actual cost was much higher at $3.81. That is almost a 45% increase in costs over the planned cost. Diversified needs to increase the standard cost, and selling price for this product. Increasing the selling price will help to offset the higher costs of manufacturing the Quik Calc, also by increasing the standard cost; DR will be able to create a more accurate budget that will allow them to focus on other issues such as increasing the number of units being sold. The budgeted number of units to sell was 380,000 however only 310,000 units were sold. The final recommendation for DR would be to intensify their marketing efforts with regard to the Quik Calc. Once they have their costing issues worked out, they should spend quite a bit of time, and effort on promoting this product since it is their largest seller to date. ...read more.

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