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Managerial Accounting-Budgeting

Differential Analysis-knowing which costs are relevant etc.

Lewis company:

production and sales information for Lewis Company.

Product information

Prod B

Beginning inventory
0

Units produced
10,000

Units sold
9,000

Selling price per unit
$300

Variable costs per unit

Direct material
120

Direct labor
60

Variable overhead
40

Variable selling and administrative
10

Fixed costs

Fixed manufacturing overhead
250,000

Fixed selling and administrative
100,000
*******************************

Lewis Company

Absorption Income Statement

For the period ending Dec. 31, 2012

Sales
$2,700,000

Cost of goods sold
2,205,000

Gross profit (margin)
$495,000

Selling and administrative expenses
180,000

Net income
$315,000

Lewis Company receives an offer to make a new product for a new customer. The product is called C. Customer wants 1100 units. Product see has the same cost structure as Product B above with three exceptions. The new customer will only pay $245.00 per unit. Direct materials costs will onlu decrease $15 per unit and Lewis does not have to incur any variable selling and admin expenses.

Make a list of expenses and amounts that are relevent for this decision. How much with the sale of this product contributes to the profitability of Lewis?
What if the company only paid $225.00 per unit. How does that change the contribution towards profitability? If you were the manager would you accept this order? What cosiderations other than financial would affect the decision?

Solution Preview

See attached

A) Make a list of expenses and amounts that are relevant for this decision.
Expenses for Product C
Variable expense is 1100 X total variable cost per unit except for selling and administration = 1100 X $205 = $225,500. Follow the formula above.
Fixed expense is the total expense ($250,000) X 1,100/10,000). This is the portion of fixed that is ...

Solution Summary

Managerial Accounting and budgeting along with Income Statements to determine product mix. Considering all expenses to determine profitability.

$2.19