Steel Metals Ltd manufactures and sells iron rods that is used in the construction of roads. The product is manufactured and sold in 20' long rods. The product is generally produced and sold to match customer demand, and there is not a significant amount of finished goods inventory at any point in time. Summary information for 2020 is as follows: Sales were $20,000,000, consisting of 5,000,000 rods. Total variable costs were $11,000,000. Total fixed costs were $8,000,000. Net income was $1,000,000. The general economic conditions appear to be deteriorating heading into 2021, and there is some concern about a reduction in sales volume. The following questions should each be answered independent of one another. Required: a) What is the company's break-even point in 20' long rods? b) Can the company sustain a 30% reduction in total volume, and remain profitable? c) The company's sole shareholder, Pant Sharma, generally lives off dividends paid by the business. The business typically declares and pays a dividend equal to 25% of net income. If Pant needs to receive $100,000 in dividends for normal living expenses, what total revenues must Steel Metals Ltd produce in 2021?
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Steel Metals Ltd manufactures and sells iron rods that is used in the construction of roads. The product is manufactured and sold in 20' long rods. The product is generally produced and sold to match customer demand, and there is not a significant amount of finished goods inventory at any point in time. Summary information for 2020 is as follows:
Sales were $20,000,000, consisting of 5,000,000 rods.
Total variable costs were $11,000,000.
Total fixed costs were $8,000,000.
Net income was $1,000,000.
The general economic conditions appear to be deteriorating heading into 2021, and there is some concern about a reduction in sales volume. The following questions should each be answered independent of one another.
Required:
- a) What is the company's break-even point in 20' long rods?
- b) Can the company sustain a 30% reduction in total volume, and remain profitable?
- c) The company's sole shareholder, Pant Sharma, generally lives off dividends paid by the business. The business typically declares and pays a dividend equal to 25% of net income. If Pant needs to receive $100,000 in dividends for normal living expenses, what total revenues must Steel Metals Ltd produce in 2021?
- d) What is the company’s margin of safety in dollars, assume sales is expected to be $22,000,000 in 2021?
- e) Provide two suggestions to assist the company to maintain its margin of safety level in 2021.
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