ACC202 Management Accounting

The Citrus Company  produces quality fruit.  It has been producing and selling 40,000 boxes per month during the Spring and Summer months. During  the Autumn and Winter months it has been noticed that only 30,000 boxes are sold.The Citrus Company  provides the following information and has asked you to provide advice on the issues raised in each of the following parts:

Manufacturing costs
Direct material                                                         $4.00 per box
Direct labour                                                               2.00 per box
Variable overhead                                                      0.80 per box
Fixed overhead                                                         $10,000
Marketing costs
Variable                                                                       $0.50 per unit
Fixed                                                                            $15,000

The Citrus Company  has been selling these boxes of fruit  for $9.50 each and has asked you to provide answers to the following.Each part is to be considered  independently  of the others.

Required :

(a) Calculate the monthly profit during a Summer month when all  40,000 boxes  produced in a month  are sold .

(b) A request has come from overseas to supply 5,000 boxes of fruit per month during the Autumn and Winter months at a price of $7.50 per box .If this  request is accepted it would cost an extra $0.40 per box for freight and a one off cost of landing cost of $1000 ..Should this one off request be accepted based on profit alone What other factors should be considered

(c) Another request has come in the form of a long term government contract which wants you to supply 10,000 boxes within the country per month for $8 per box .This contract would be for 10,000 boxes each month for the year .Should this offer be accepted?Provide reasons for your decision.

(d)The Citrus Company has had another request from an outside supplier to supply 8,000 boxes of fruit year round(each month) for a price of $7.80 per box.The Citrus Company would incur additional freight  costs of $0.20 per box but no other additional costs .Should the Citrus Company accept this offer  on financial grounds What other factors might it consider

(e)The Citrus Company  has an offer to rent out its property to the government so that affordable  housing can be built. The government would pay the Citrus Company  Parker $60,000 per month ,assuming it would use the property on an ongoing basis .If Citrus Company sells 40,000 boxes during the Spring and  Summer months and 30,000 boxes during the Autumn and Winter months should Citrus Company accept the offer on  purely financial grounds ..Show calculations to support your answer.

Calculation of monthly profit

Monthly profit, as per calculation, during the month of summer is $63,000. A request has come from overseas to supply 5,000 boxes of fruit per month during the Autumn and Winter months at a price of $7.50 per box .If this request is accepted it would cost an extra $0.40 per box for freight and a one off cost of landing cost of $1000.

Calculation of first month profit

 Yes, this offer should be accepted as it will result in profit of $500 in the first month and $1500 second month onwards. However, company needs to consider the other factors before acceptance of this offer. Other factors are: 

1. Additional Raw Material availability – Company needs to ensure that raw material required for completion of new order is available in the market.
2. Additional Labour availability - Company needs to ensure that labour required for completion of new order is available in the market.
3. Working Capital requirement – Company may need to invest some additional amount in working capital. That also needs to be calculated and arranged before acceptance of offer.
4. Price of raw material and labour – Company needs to be sure that price of raw material and labour will remain at same level when additional demand is created by the company. Normally, more demand will result in higher prices. If the prices of raw material and labour increases, company will have to recalculate the profitability before acceptance.
5. Effect on existing business – If the company reduces price for this new customer, existing customers may also demand lower price. So, company needs to provide for a confidentiality clause in the agreement so that existing customer do not know the new prices.

Another request has come in the form of a long term government contract which wants you to supply 10,000 boxes within the country per month for $8 per box .This contract would be for 10,000 boxes each month for the year.

Calculation of monthly profit

 This offer should be accepted as it leads to profit of $12000. Total cost of production is $6.80 per unit whereas revenue is $8 per unit. There will be no marketing costs to be incurred. Also, fixed costs will not be part of calculation as it is being already incurred for existing business. Therefore, company will earn a profit of $1.20 per unit leading to total monthly profit of $12000.

The Citrus Company has had another request from an outside supplier to supply 8,000 boxes of fruit year round (each month) for a price of $7.80 per box. The Citrus Company would incur additional freight costs of $0.20 per box but no other additional costs.

Calculation of monthly profit

 This offer should be accepted as it is leading to profit of $6400 per month. Some other factors also needs to be considered before acceptance of this offer. These factors include:

1. Existing capacity – Whether the existing capacity is sufficient to produce for this the additional offer or not. If not, capacity extension cost also needs to be considered before taking any decision. Additional Raw Material availability – Company needs to ensure that raw material required for completion of new order is available in the market.
2. Additional Labour availability - Company needs to ensure that labour required for completion of new order is available in the market.
3. Working Capital requirement – Company may need to invest some additional amount in working capital. That also needs to be calculated and arranged before acceptance of offer.
4. Price of raw material and labour – Company needs to be sure that price of raw material and labour will remain at same level when additional demand is created by the company. Normally, more demand will result in higher prices. If the prices of raw material and labour increases, company will have to recalculate the profitability before acceptance.
5. Effect on existing business – If the company reduces price for this new customer, existing customers may also demand lower price. So, company needs to provide for a confidentiality clause in the agreement so that existing customer do not know the new prices.

The Citrus Company has an offer to rent out its property to the government so that affordable housing can be built. The government would pay the Citrus Company $60,000 per month, assuming it would use the property on an ongoing basis. Therefore, profit is $60000 per month in this case. 

Total Yearly profit in case of Govt. Offer

 If Citrus Company sells 40,000 boxes during the Spring and Summer months and 30,000 boxes during the Autumn and Winter months, profit will be 

Profit during Spring and Summer month

Profit during Autumn and Winter month

Total Yearly Profit in case of own production

It is clear that yearly profit, in case of Govt. offer, is higher than the profit under own production option. Therefore, Govt. offer should be accepted.