Question

Problem #2 15 Points William Company makes a single product, bucket stoppers. During 2017, 155,000 units were sold and 150,000 units were produced. Information for 2017 appears below Beginning inventory in units Variable production cost per unit Variable operating costs per unit Fixed production cost per year Fixed selling and administrative cost per year Selling price per unit 6,000 $1.20 $0.80 $127,500 $32,000 $6.00 How much is the contribution margin for 2017 under variable costing? How much is the gross margin for 2017 under full costing? Explain why variable and full costing produce different results а. b. с.

d) In addition to the conventional idea of manufacturing at the lowest cost possible, the idea of strategic cost advantage focusses on value creation wherein higher cost of production is justified if end users are willing to pay a premium price for the product being produced. How would go about recommending CEO’s of William Company to achieve Strategic Cost Advantage? Using some sort of tool or method to justify it?

Answer 1

Answer is given below

Contribution Margin a) Selling price Less: Variable Cost Variable production cost Variable operating cost Total Variable cost $6.00 $1.20 $0.80 $2.00 $4.00 Contribution per unit Gross Margin under full costing Selling price b) $6.00 Variable production cost Fixed Manufacturing cost Manufacturing cost per unit $1.20 $0.85 $2.05 $3.95 Gross Margin c) Results differ because under Variable costing only variable unit cost is considered In full costing Fixed manufacturing cost is also considered by dividing it with production units Strategic Cost advantage through value creation d) Companies can perform Value chain analysis to gain strategic cost advantage Step 1 Identify the primary and support activities A company should first classify its activities into primary and support activities based on all activities in the organisation. Step 2 Establish importance of each activity in total cost of the product The activities involved in producing each product or service should be assigned a cost to it to understand its impact in total cost Step 3 Identify cost drivers Cost drivers should be identified for various activities For eg:- set up, inspection, Quality inspection, etc Identify links between activities Step 4 Understanding links between various activities is very important Some activities elimination may lead increase in cost for other activities Hence understanding helps in how cost improvements would affect whole value chain Step 5 Identify opportunities for reducing cost Once study is done companies can eliminate non value adding activities to reduce cost

$6.00 Contribution Margin Selling price Less: Variable Cost Variable production cost Variable operating cost Total Variable cost $1.20 $0.80 $2.00 Contribution per unit $4.00 b) Gross Margin under full costing Selling price $6.00 Variable production cost Fixed Manufacturing cost Manufacturing cost per unit $1.20 $0.85 $2.05 Gross Margin $3.95 Results differ because under Variable costing only variable unit cost is considered In full costing Fixed cost is also considered by dividing it with production units Hence Fixed cost is the only difference d) Strategic Cost advantage through value creation Companies can perform Value chain analysis to gain strategic cost advantage Step 1 Identify the primary and support activities A company should first classify its activities into primary and support activities based on all activities in the organisation. Step 2 Establish importance of each activity in total cost of the product The activities involved in producing each product or service should be assigned a cost to it to understand its impact in total cost Step 3 Identify cost drivers Cost drivers should be identified for various activities For eg:- set up, inspection, Quality inspection, etc Step 4 Identify links between activities Understanding links between various activities is very important Some activities elimination may lead increase in cost for other activities. Hence understanding helps in how cost improvements would affect whole value chain Step 5 Identify opportunities for reducing cost Once study is done companies can eliminate non value adding activities to reduce cost