Thursday, April 15th, 1999
Announcements:

Bring book to class on Tuesday

Lecture notes:

Budgeted	4/1/99	4/30/99
Raw Materials	15,000 units	23,000 units
Finished Goods	50,000 units	41,000 units

Budgeted April Sales = 75,000 units
Each unit manufactured consumes 3 units of raw materials.

FINISHED GOODS
# units produced	# units sold
	Change = 9,000 units

# sold > # produced by 9,000
# produced = 66,000 units

RAW MATERIALS
# units purchases	# units consumed for current period
Change = 8,000

# purchased > # consumed by 8,000
consumption = 198,000 units
# purchased = 206,000 units

Chapter 22

• External and internal factors
  *pages 957-959
• Gross margin pricing
• Profit margin pricing
• Return on assets pricing
• Target costing
• Transfer pricing

Example:

Variable production costs	700,000
Fixed manufacturing overhead	500,000
Selling and admin. Costs	300,000

Desired profit = $300,000

Sales	X
- COGS	- 1,200,000
GP	600,000
- S & A	- 300,000
Net Income	300,000

X = $1,800,000

Gross Margin Pricing

Markup percentage: GP / COGS = 600,000 / 1,200,000 = 50%

Profit Margin Pricing

Markup percentage: desired profit / total expenses = 300,000 / 1,500,000 = 20%

Transfer Pricing

Cost of manufacturing product Z:

Materials	$10 per unit
Labor	$12 per unit
Variable manuf. Overhead	$8 per unit
Fixed manuf. Overhead	$5 per unit
Total	$35 per unit

Division A produces product Z and sells product Z to division B for $40 per unit. An outside supplier has offered to provide product Z to division B for $38 per unit.

Relevant Manufacturing Costs:

Materials	10
Labor	12
Var. manuf. Overhead	8
	$30

Transfer Price = $30-$38

Special Order

Costs of producing and selling a widget:

Var. manuf.	10
Fixed manuf.	8
Var. S & A	5
Fixed S & A	2
Total cost per unit	$25

A customer is offering our company $19 per unit for 5,000 widgets. Should we accept the order?

Yes, if the sales price > variable costs

Manufacturing capacity = 25,000 units
Estimated sales = 23,000 units at $27 per unit

Contribution margin from special order = 5,000 x $4 = $20,000

Contribution margin loss from regular sales = 3,000 x $12 = $36,000

Change in CM = - $16,000
Do not accept the order.

Segment Analysis

Sales	500,000
- VC	- 300,000
CM	200,000
- Unavoidable FC	- 150,000
- Avoidable FC	- 100,000
Net Income	- 50,000

Change in CM =	- 200,000
Change in FC =	100,000
Change in NI =	- 100,000

If change in CM > change in FC, the segment should continue operating.