A SPECIAL KIND OF GREEN

A Group Business Case Presented to the Accountancy Department De La Salle University

In partial fulfillment Of the course requirements In ACTMANA section K33

SUBMITTED TO: Ms. Legaspi

SUBMITTED BY: Dela Cruz, Chino B. Duka, Lois Klark D. Navarro, Anna Patricia R. Ong, Mark Benedict C. Ong, Miles Matthew A. Po, Jonathan Neil L. Timpug, Raymond Yiu, Lorraine Kristel L. December 4,2012

I.

INTRODUCTION Art, the new accountant of Green Manufacturing, after observing three weeks of

constant input prices and production efficiencies but varying output, decided to do a cost analysis after seeing the production costs of the company for producing Green Health, their only product. Soon, Art developed a few equations that could determine the break-even volume and found out that work-in-process and finished goods inventories were practically dont exist because production and shipping was usually based on orders. After discovering that P7 was the typical selling price of their product, he analyzed the income statements for those three weeks and saw from it that cost of goods sold per unit and the number of units itself had an indirect relationship. Then using 500 units of sales per week, Art came up with some standardized cost information that he also used to establish that first, with the P7 selling price per unit, P6.60 of it belongs to costs and only P0.40 of it is profit. Second, for sales representatives on the road, it is vital that a unit never be sold for less than P6.60 plus the profit margin because P6.60 is just the break-even price. Third, and now for direct office sales where no commission is paid, P5.90 is the break-even price per unit so a unit must also never be sold less than this price plus the profit margin. Finishing the chart with all the information and decision rules in it, he directed it to Mr. Brown, the head and chief decision maker of the whole company. Despite being pleased with Arts work, Mr. Brown ordered that sales representatives and office salespeople to sell each unit at P7.26 and P6.49 respectively which immediately caught the attention of the new accountant, who was so sure that P7 had to be the maximum selling price per unit. After talking again with Art, Mr. Brown once again revised the policy so that each unit could be sold for at least P7. While Mr. Brown was on vacation, business was still ongoing and both sales representatives and office orders were aligned with Arts decision of not selling a unit lower than P6.60 and P5.90 respectively. Those orders that were complying with the decision rules were accepted while those that were not were rejected, except for one transaction involving Pinky Starr. Amidst being aware of the rules, she accepted an order for 100 units for only P5.50 per unit which in effect, caused the company to lose P0.40 per unit sold on this transaction. As Mr. Brown returned, he proposed that the company sell 350 units at P8 per unit because this would result to a higher profit per week, even if the company had to pay an additional 5%

commission. And after seeing the accepted order of Pink Starr, Mr. Brown fired her on the basis of the incurred loss of P0.40 per unit. II. DISCUSSION What is the break-even volume for the past three weeks? Support your answer with proper computations. Break-even volume: P2,982 or 426 units Supporting Computations:

Separation of Semi-Variable Costs to Fixed and Variable Costs

Variable Cost:

Fixed Cost:

What decision rules would you develop for the company? Support your rules with computations. You may include assumptions as you deem necessary.

Decision Rule #1: If selling at P7, do not sell the product less than 426 units because we will just break-even at that quantity.

Decision Rule #2: Special orders should be computed separately since some of the costs incurred would vary per order request. Decision Rule #3: Excess units sold should not be sold for less than the variable cost per unit which is P3.50 for sales representatives and direct office sales at P2.88.

Are the decision rules you had developed in (b) above consistent with those developed by Art? Explain what caused the differences, if any.

No. Art based his decision rules that the total cost per unit is P6.6 but in truth, the total cost per unit is just P6.482. The rules should be based on data that is developed by the constants like variable cost per unit and fixed cost. Art included the fixed cost per unit in the decision rule basis which should not have been included since it is not constant. With the different errors in the computation would give you an incorrect basis for analysis. At the same time, he should not

just use any number of units as basis since he will not be sure of the results. He should have used the break-even quantity as basis since it is the only one you could be sure of the result.

Do you agree with the actions done by Mr. Brown after looking over the report for the fourth week? Explain your answer.

No, the group disagrees with what Mr Brown has done during the fourth week. The company should not depend on the fixed cost per unit as their analysis. The production and the fixed cost per unit differs from one another. Art based his analysis on 500 units so if the number of units decrease, the different costs would be inaccurate. New computations should be done every time a change occurs if this analysis would be used. Another, we believe that the employee, Pinky Starr should not have been fired since she generated additional profits for the company which is a good decision. And the company should not have rejected those orders at P6.50 and P5.75 since these would also have incurred additional profit to the company.

What, if any, additional information do you think Mr. Brown needs to make a sound decision? Why?

Mr. Brown should use the break-even analysis in making his decisions. The break-even analysis would serve as a guide on how the company prevents incurring losses. From it, they would be able to determine what the minimum number of units to be sold is and how the company could recover a previous loss incurred. He should also not use this type of income statement. Instead, he should use the contribution format income statement because in this approach, he would be able to see the variable and fixed costs separately. III. CONCLUSION/RECOMMENDATION Art did a good job in summarizing the information that was taken for the past 3 weeks. He had made the average pricing with honest intentions and it was to gather the information; however it doesn't mean that he would overlook the verified numbers. Mr.Brown should have still used the actual available data but he should have enforced the standardized pricing to the green products so that he should have a gauge of possible outcomes. With what Mr. Brown has done, he should consider that his actions may cost the company its money in the remote future as he expects that he will be able to sell all his products; if he would set his products at P8 per unit then he would have no problem. Art should commit himself to diligently update the charts to confirm the numbers in the chart are accurate; even if using the average would make things simpler, using the actual data is still the best way for them to make proper efficient and accurate decisions. Mr. Brown needs to be more tolerant and realistic with all his demands;

while increasing the price is bearable, it should still be within the reasonable range; then if the demand increases then it would be done for them to increase their price. Decision making within the company should be made comprehensively based on actual data, obtained from precise computations. IV. REFERENCES

Allen, B.R., Brownlee, E.R. II, Haskins, M.E., & Lynch, L.J. Cases in Management Accounting and Control Systems, 4th edition. Pearson Prentice Hall.

Peer Evaluation: Dela Cruz, Chino Duka, Lois Navarro, Anna Ong, Mark Ong, Miles Po, Jonathan Timpug, Raymond Yiu, Lorraine _____ _____ _____ _____ _____ _____ _____ _____ ___________________________

Peer Evaluation: Dela Cruz, Chino Duka, Lois Navarro, Anna Ong, Mark Ong, Miles Po, Jonathan Timpug, Raymond Yiu, Lorraine _____ _____ _____ _____ _____ _____ _____ _____ ___________________________

Peer Evaluation: Dela Cruz, Chino Duka, Lois Navarro, Anna Ong, Mark Ong, Miles Po, Jonathan Timpug, Raymond Yiu, Lorraine _____ _____ _____ _____ _____ _____ _____ _____ ___________________________

Peer Evaluation: Dela Cruz, Chino Duka, Lois Navarro, Anna Ong, Mark Ong, Miles Po, Jonathan Timpug, Raymond Yiu, Lorraine _____ _____ _____ _____ _____ _____ _____ _____ ___________________________

Peer Evaluation: Dela Cruz, Chino Duka, Lois Navarro, Anna Ong, Mark Ong, Miles Po, Jonathan Timpug, Raymond Yiu, Lorraine _____ _____ _____ _____ _____ _____ _____ _____ ___________________________

Peer Evaluation: Dela Cruz, Chino Duka, Lois Navarro, Anna Ong, Mark Ong, Miles Po, Jonathan Timpug, Raymond Yiu, Lorraine _____ _____ _____ _____ _____ _____ _____ _____ ___________________________

Peer Evaluation: Dela Cruz, Chino Duka, Lois Navarro, Anna Ong, Mark Ong, Miles Po, Jonathan Timpug, Raymond Yiu, Lorraine _____ _____ _____ _____ _____ _____ _____ _____ ___________________________

Peer Evaluation: Dela Cruz, Chino Duka, Lois Navarro, Anna Ong, Mark Ong, Miles Po, Jonathan Timpug, Raymond Yiu, Lorraine _____ _____ _____ _____ _____ _____ _____ _____ ___________________________

Peer Evaluation: Dela Cruz, Chino Duka, Lois Navarro, Anna Ong, Mark Ong, Miles Po, Jonathan Timpug, Raymond Yiu, Lorraine _____ _____ _____ _____ _____ _____ _____ _____ ___________________________

Peer Evaluation: Dela Cruz, Chino Duka, Lois Navarro, Anna Ong, Mark Ong, Miles Po, Jonathan Timpug, Raymond Yiu, Lorraine _____ _____ _____ _____ _____ _____ _____ _____ ___________________________