ACCT Module 2, pt1,2

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School

Laurentian University *

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Course

2001

Subject

Accounting

Date

Apr 3, 2024

Type

pdf

Pages

Uploaded by ChancellorDangerKangaroo41

Sales per meal = $40 Cost per meal = $12 Profit per meal = $28 Rent per year = $4,000*12 = $48,000 Cleaning per year = $800*12 = $9,600 Replacements per year = $300*12 = $3,600 Utilities per year = $1,900*12 = $22,800 Salaries = $50,400 Total fixed = $134,400 To break even need to have the total earned of meal sales equal to $134,000 at $28 profit per item. $134,400/$28 per meal = 4,800 meals to break even. 4,800 meals * $40 per meal = $192,000 To break even, they must sell 4,800 meals or generate $192,00 in sales revenue. $75,600 operating income means they have that amount over their breakeven value. $75,600/$28 per meal = 2,700 meals 2,700 meals + 4,800 meals = 7,500 meals A total of 7,500 meals would be needed. 7,500 meals/50 weeks = 150 meals per week 150 meals/5 days = 30 meals per day. To do this, an average of 30 dinners must be served each evening. They should open the restaurant if they anticipate it will attract a lot of interest and consistently run at least 50% capacity. They need to sell about 19 meals a night to break even, which is less than half of their total capacity as, according to their present business strategy, they can feed 56 people. They will make the $75,600 they want to if they run at about 50% of capacity every night. This is very doable, and since they can serve 56 meals a day—much more than the 30 needed to reach this income—they may be able to make even more money. 1. Provide a summary of why Oak Leaf's profits are decreasing, even though sales are increasing.

2. Compute the amount that should be quoted for each of the four customers based on an activity-based cost (ABC) system. 1. Summary of Profit Decrease at Oak Leaf: The crucial issue at hand is why Oak Leaf's profits have decreased even while sales have increased. Due to Dale and Chip's realization that a thorough grasp of their cost system is required, an Activity-Based Costing (ABC) System was developed. The purpose of this calculated action is to obtain knowledge about better pricing structure. The production-related issues at Oak Leaf are a major factor in the company's declining profits despite rising sales. Complicated design work, changing colour requirements, and volume variations are only a few of the factors that drive up costs and affect profitability overall. The design process takes a lot of time and money, especially when creating new or updated logos. In addition, embroidery labour, setup time, colour changes, and administrative fees each order increase the complexity and cost of production. It's possible that by ignoring the particular cost considerations connected to each order, the initial quoting approach overestimated real production costs. 2. Computing Quotes Based on Activity-Based Costing (ABC) System: The effectiveness of Oak Leaf Embroidery's product quoting and markup is the primary concern. The main query is whether it makes sense to use the Activity-Based Costing (ABC) System. Profits at Oak Leaf Embroidery could steadily drop if the ABC system is not implemented. An Activity-Based Costing (ABC) system must be used to guarantee correct quotation computation for each of the four clients. For this methodical approach, the price breakdown for a T-shirt logo embroidery serves as the starting point. ● Direct materials cost: $4 ● Direct labor cost: $2 ● Manufacturing overhead (MOH) cost: $3.50 The total cost for each job is calculated using the formula: Total Cost=(Direct Materials+Direct Labor+MOH)×Number of Shirts Job 1: ● Repeat customer

● 2 colors, 25 shirts ● Total Cost for Job 1=($4+$2+$3.50)×25=$237.50 Job 2: ● Repeat customer ● 5 colors, 200 shirts ● Total cost for Job 2=($4+$2+$3.50)x25=237.50 Job 3: ● Repeat customer with a redesign ● 2 colors, 200 shirts ● Total cost for Job 3=($4+$2+$3.50)x200=1,900 Job 4: ● New customer ● 5 colors, 25 shirts ● Total cost for Job 4=($4+$2+$3.50)x25=237.50 Using the Activity-Based Costing (ABC) method on each project, Oak Leaf Embroidery can guarantee precise estimates of production costs, including direct labour, direct materials, and manufacturing overhead. This tactical choice is essential for preserving or growing profit margins since it guarantees that every purchase is fairly priced in accordance with its particular needs. Strengths: The ABC system exposes inaccuracies in Dale and Chip's shirt cost quotations. Offers a precise framework for structuring prices to maximize profits. Weaknesses: Excessive time spent on set-up and color changes without adequate charges. Operating at a loss. Recommendations: It is highly recommended to apply the Activity-Based Costing (ABC) System in order to improve cost accuracy. In order to maximize the benefits of this technology as their business grows, Dale and Chip should become acquainted with it. Investing in a new embroidery machine that has a shorter colour change and setup time could also boost productivity and profitability. This suggestion is consistent with the categorization of tasks lacking value addition. A potential self-paying investment, the cost-benefit analysis should compare the time saved with a new machine to the present operational periods. Lastly, the ABC System's minimum purchase order requirement for shirts with multiple

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colour changes solves the problem of underpricing for these kinds of purchases. In order to address decreasing profits, increase cost accuracy, investigate machinery upgrades, and strategically set minimum purchase orders, Oak Leaf Embroidery must immediately implement the ABC method. This will ultimately improve profitability and operational efficiency.