Katy EH Manufacturing Company | ASSIGNMENT | Evaluation of Business Plans, Budgeting and Variance Analysis | | Algernon Jones | 05-Dec-15 |
Katy EH Manufacturing Company
INTODUCTION:
This study was conducted to evaluate various business plans of Katy EH Manufacturing Company and their impact on profit before tax, preparation of budget as per selected option and investigation of variances of operating budget of year 2016.
Answer Part (a):
To decide whether product line Grill A be dropped or not by Katy EH we will calculate contribution margin from Grill A. If the contribution margin becomes zero then we will suggest dropping the said product line otherwise not depending on other non-financial factors.
Calculation of Contribution Margin from Line Grill A:
Revenue | 80,000 x 150 = | $ 12,000,000 | | | | Less: Relevant Cost: | | | Direct Material | 80,000 x 17 = | 1,360,000 | Direct Labour | 80,000 x 21 = | 1,680,000 | Supplies | 80,000 x 7 = | 560,000 | Indirect Labour | 80,000 x 10 x 50% = | 400,000 | Energy | 80,000 x 12 x 50% = | 160,000 | | | (4,160,000) | Contribution Margin | | 7,840,000 |
Impact of dropping Grill A on Profit Before Tax: Budgeted Income Before Tax For The Year 2016 | $ 6,680,000 | Reduction in Profit Before Tax if Grill A is dropped | (7,840,000) | Budgeted Loss if Grill A is dropped | | (1,160,000) | The product line Grill A contributes to the profit before tax $ 7,840,000. Therefore, product line Grill A must not be dropped. This option will make the whole business of EH suffer causing a net loss of $ 1,160,000. The whole business is going to shut down if this plan is considered.
