Management Accounting for Decision Making - LILO Engineering



Management Accounting for Decision Making - LILO Engineering

Introduction

An organization must take into account the methods that ensure that the organizational goals, its performance and operations are aligned (Drury, 2008, pp 201 - 208). The costing technique that will be used would be Marginal Costing. Contribution margin analysis will be used for the purpose of determining the best possible option for LILO Engineering. Contribution margin analysis makes it simple for the company to decide such issues, which is the reason why contribution analysis is made an essential part of all decision making procedures that require costing (Kotler & Armstrong, 2004, pp 120 - 128). The decision-making process greatly depends on the known variables that include the various production costs associated with production of the new product. There are many variables that need to be kept well under consideration while making the costing decisions (Charles, Srikant & Foster, 2003, pp 121 - 129). In this scenario, there are many variables that need to be incorporated in the calculations.

Part A

Using the Remaining Cutting Machine Hours Available, How Many of Each of the Four Products Should the Company Produce Themselves?

Calculate the Maximum Contribution Which Could be Achieved.

The total capacity of the machine is 600,000 hours out of which 80 % is required for the products that are to be produced internally. These means that only 20 % of the total machine capacity can be used to produce the four products.

Availble Machine Hours=600,000x20 %

Availble Machine Hours=120,000 machine hours

120,000 machine hours can be allocated to the four products, table 1 below shows the relevant information regarding the costs of the four products:

Particulars

Deluxe

Grand

Midi

Mini

Selling Price

£ 3.00

£ 3.60

£ 21.00

£ 7.00

Variable materials

£ 1.00

£ 2.00

£ 10.00

£ 4.00

Variable labour

£ 1.50

£ 1.00

£ 05.00

£ 2.50

Fixed overheads

£ 1.50

£ 1.00

£ 05.00

£ 2.50

Total cost

£ 4.00

£ 4.00

£ 20.00

£ 9.00

Table 1: Cost Structure of four Products

In order to determine as to how much the company should produce of each of the four products, it is important that a link be established between the total costs of each product, the machine hours required by each product and the contribution margin (explained in later part of the report) of each product.

Contribution Margin per unit=Selling Price per unit - Variable costs per unit

The contribution margin, as per the forumla mentioned above, of all the products has been calculated and presented in the table 2 below:

Particulars

Deluxe

Grand

Midi

Mini

Selling Price per Unit

£ 3.00

£ 3.60

£ 21.00

£ 7.00

Variable Materials per Unit

£ 1.00

£ 2.00

£ 10.00

£ 4.00

Variable Labour per Unit

£ 1.50

£ 1.00

£ 5.00

£ 2.50

Fixed Overheads per Unit

£ 1.50

£ 1.00

£ 5.00

£ 2.50

Total Cost per Unit

£ 4.00

£ 4.00

£ 20.00

£ 9.00

Contribution Margin per Unit

£ 0.50

£ 0.60

£ 6.00

£ 0.50

Machine Hours per Product

2.00 hours

3.00 hours

2.00 hours

1.00 hour

Table 2: Cost Structure & Contribution Margin of four Products

Scenario 1: Equal Distribution of Idol Capacity

The 120,000 machine hours can either be divided equally for all four products, or it can be allocated after extensive contribution margin analysis to ensure that the maximim is utlized of the availble idol capacity of the machine.

Table 3 provides an in depth analysis ...