Question

PROBLEM 1 PT Amira is a company that produces home appliances. ABC segment, one of PT Amira's segments, is a segment dedicated to produce washing machine. Income statement below shows ABC segement performance during 2017. The production capacity is 30,000-60,000 unit per year Revenue (40,000 unit x $8) 320,000 Variable costs per unit: (40,000) (60,000) material (40,000 x $1) ect labor (40,000 x $1.5) Overhead cost (40,000 x$0.4) Delivery expense (40,000 x $0.25) commission (40,000 x$1) (16,000) (10,000) (40,000 Profit margin Fixed costs 154,000 (30,000) (50,000) (35,000) Advertising Plant supervisor salary Allocated overhead Depreciation expense Net Income (Loss) Required 1. Beta Store, a manufacturing company, offers to buy 2,000 units of PT Amira's washing machine. Beta Store will replace the washing machine logo with their own in order not to affect PT Amira's existing customers. Since this offer is addresed directly to the owner of PT Amira, there will be no commission fee for this transaction. Beta Store offers to buy at $4.50 per unit. According to your calculation, should PT Amira accept the offer from Beta Store? Please explain your answer 2. PT Amira has an opportunity to buy 40,000 units of the same washing machine from competing company at $4.30 per unit. PT Amira can replace the logo with their own to distribute the product. Should PT Amira make or buy the product? Please explain your answe 3. With the aassumption mentioned at the beginning (ABC segment suffered loss of $11,000) should the company close ABC segment? Please explain your answer

Answer 1

Solution 1):

	Current Situation		Special Order
	Total $ (40,000 Units)	Per Unit	Total $ (2,000 Units)	Per Unit	Total (42,000 Units)
Sales	3,20,000.00	8.00	9,000.00	4.50	3,29,000.00
Variable Costs			-		-
Direct materials	40,000.00	1.00	2,000.00	1.00	42,000.00
Direct labour	60,000.00	1.50	3,000.00	1.50	63,000.00
Variable manufacturing overhead	16,000.00	0.40	800.00	0.40	16,800.00
Delivery expenses	10,000.00	0.25	500.00	0.25	10,500.00
Sales Commission	40,000.00	1.00	-	-	40,000.00
Total Variable Costs	1,66,000.00	4.15	6,300.00	3.15	1,72,300.00
Contribution = Sales - Total Variable Cost	1,54,000.00	3.85	2,700.00	1.35	1,56,700.00
Fixed Costs					-
Advertising	30,000.00	0.75	-	-	30,000.00
Plant Supervisor Salary	50,000.00	1.25	-	-	50,000.00
Allocated Overheads	35,000.00	0.88	-		35,000.00
Depreciation Expense	50,000.00	1.25	-	-	50,000.00
Total Fixed Costs	1,65,000.00	4.13	-	-	1,65,000.00
Profit = Contribution - Fixed Cost	(11,000.00)	(0.28)	2,700.00	1.35	(8,300.00)

Note: While considering the new proposal, the company should only consider the variable costs as with fixed costs already accounted for in regular production.

In the special order, the company is earning a contribution of $3.15 for every unit of special order. Hence, it is recommended to accept the special order as it will reduce the total loss by $2,700.

Solution 2)

	Make		Buy
	Total $ (40,000 Units)	Per Unit	Total $ (40,000 Units)	Per Unit	Net Income (Increase (Decrease)
Sales	3,20,000.00	8.00	3,20,000.00	8.00	-
Variable Costs
Direct materials	40,000.00	1.00		-	40,000.00
Direct labour	60,000.00	1.50		-	60,000.00
Variable manufacturing overhead	16,000.00	0.40		-	16,000.00
Delivery expenses	10,000.00	0.25		-	10,000.00
Sales Commission	40,000.00	1.00		-	40,000.00
Purchase Price	-	-	1,72,000.00	4.30	-1,72,000.00
Total Variable Costs	1,66,000.00	4.15	1,72,000.00	4.30	-6,000.00
Contribution = Sales - Total Variable Cost	1,54,000.00	3.85	1,48,000.00	3.70	-6,000.00
Fixed Costs					-
Advertising	30,000.00	0.75	30,000.00	0.75	-
Plant Supervisor Salary	50,000.00	1.25	50,000.00	1.25	-
Allocated Overheads	35,000.00	0.88	35,000.00	0.88	-
Depreciation Expense	50,000.00	1.25	50,000.00	1.25	-
Total Fixed Costs	1,65,000.00	4.13	1,65,000.00	4.13	-
Profit = Contribution - Fixed Cost	(11,000.00)	(0.28)	(17,000.00)	(0.43)	(6,000.00)

Note: It will be assumed that the Fixed Costs will be incurred by the company irrespective of Making the units by itself or Buying the units for outsider.

From the above analysis, the company is recommended to make the units instead of buying as if the units are bought from outsider, the cost of the company increases by $6,000.

Solution 3) With the assumption mentioned at the beginning (ABC segment suffers a loss of $11,000), the company is recommended to continue with the ABC segment as ABC segment is generating a positive contribution of $154,000. The main reason for the ABC segment making losses is the allocation of the fixed overheads. If the ABC segment is closed, the company will make a loss of $154,000.