Finance & Accounting
Pages 5 (1255 words)
Intermediate Management Accounting: Past Papers Name: Course: Professor: Institution: City and State: Date: 2011 Question 7 (a) Year 1 Year 2 Year 3 Estimated Unit sales 100 200 300 Anticipated sales price 22,500,000 20,000,000 20,000,000 Variable cost (materials) (9,000,000) (7,500,000) (6,750,000) Variable cost (Processing) (3,600,000) (3,400,000) (3,200,000) R&D Costs (8,000,000) (8,000,000) (8,000,000) Margin (100,000) 1,100,000 2,050,000 Target net operating income -0.004% 5.5% 10.25% Less Fixed costs Production capacity costs (3,000,000) (3,000,000) (3,000,000) Marketing costs (3,000,000) (2,000,000) (1,000,000) Warehouse costs (1,000,000) (2,000,000) (3,000,000) Total fixed costs (7,00
Nevertheless, the target profit margin is seen to rise substantially from a low of -0.004% in year one to 10.25% in year three. (b) Issues facing firms like KZ in making decisions on the costs to cut in order to meet the specified target income level. Costs relevance: It could be difficult for firms like KZ to associate all the costs involved to products. This makes the firm continue incurring costs that do not directly involve production hence eating on the margins. Cost classification: The firm has not classified its costs appropriately. For instance, marketing costs are classified as fixed costs and such costs are required to be consistent with sales made in a given year. In this regard, during year 2 and year 3, KZ sales were the same despite difference in marketing campaign undertaken. The marketing campaign should therefore be consistent with the amounts allocated in a given year. ...