Management

Adeet Tushar Mehta - 54001

Accounting Aman Mittal - 54007
Ayushi Mittal - 54018
David Anurag - 54021
Dipakshi Mehra - 54025
Harshit Gakhar - 54026
Luv Bansal - 54030
Manish Goel - 54033
GROUP - 5 Nityashree Bhakri - 54040
Rishabh Arora - 54046
FM - 05 Saranya Batra - 54050
Tanishq Batra - 54059
Incremental Analysis
Case Study
Incremental analysis is used to analyze the
financial information needed for decision
making. It identifies the relevant revenues and
costs of each alternative and the expected
impact of the alternative on future income.
Stark Ltd. prepares complete party kits for various types of celebrations. It is
currently operating at 75% of its capacity. It costs The Stark Ltd. $4.50 to
make a packet that it sells for $25.00. It currently makes and sells 84,000
packets per year. Detailed information follows:
The Stark Ltd. has received a special order request for 15,000 packets at a price of
$20 per packet to be shipped overseas. This transaction would not affect the
company's current business. If 84,000 packets is 75% of capacity, 112,000
packets would be 100% of capacity. The Stark Ltd. has the capacity to prepare the
15,000 packets requested without changing its existing operations. Should the
Stark Ltd. accept this special order? Using its current cost information, the answer
would be no because accepting the order would generate a $7,500 loss.
However, this is not the proper way to analyze the alternative. Incremental
analysis, which identifies only those revenues and costs that change if the
order were accepted, should be used to analyze the alternative. This requires
a review of the costs. Suppose the following information is discovered with
further analysis:

Accepting this order would not impact current sales.

To manufacture 15,000 packets would require $12.00 of direct materials and
$6.00 of direct labor.
The per unit overhead cost of $0.50 is 50% variable ($0.25) and 50% fixed
($0.25).
Selling costs {includes commissions($1/packet) and delivery costs($0.75/packet)}
for the 15,000 packets, since it did not require and selling effort by any employee
only the delivery cost would be incurred
Administrative expenses would not change.
Under this scenario, $300,000 of additional revenues would be created with
additional costs of $285,000, so operating income would increase by $15,000 if the
order were accepted. Given the available capacity, this opportunity would not result
in additional costs to expand capacity. If the current capacity were unable to handle
the special request, any new costs for expanding capacity would be included in the
analysis. Also, if current sales were impacted by this order, then the lost contribution
margin would be considered an opportunity cost for this alternative. With an
additional operating income of $15,000, this order could be accepted.
Multi Product Analysis
Case Study
CASE - ABC Ltd.
ABC Ltd manufactures and sells 3 types of house siding: restoration vinyl,
architectural vinyl, and builder grade vinyl, each with its own sales price,
variable cost, and contribution margin, as shown:

SALES PRICE PER SQUARE VARIABLE COST

FOOT PER SQUARE FOOT

BUILDER GRADE  $               6.25  $                  3.25

ACRHITECTURAL  $               7.75  $                  4.50

RESTORATION  $               9.25  $                  6.25

The sales mix for ABC ltd is 5ft sq of builder grade to 3ft sq of architectural grade to 2ft
sq of restoration grade vinyl ( a ratio of 5:3:2)

ABC ltd fixed cost are $145000 per year

Calculate what will be the contribution margin ?

Calculate what will be the break even point ?

Selling price per composite unit :

5 FT2
 $ 31.25
OF BUILDER GRADE AT $6.25

3 FT2 OF
 $ 23.25
ARCHITECUTRAL AT $7.75

2 FT2 OF
 $ 18.50
RESTORATION AT $9.25

SELLING PRICE
 $ 73.00
OF 1 COMPOSITE UNIT
Variable cost per composite unit :

5 FT2
 $16.25
OF BUILDER GRADE AT $3.25

3 FT2 OF
 $13.50
ARCHITECTURAL AT $4.5

2 FT2 OF
 $12.50
RESTORATION AT $6.25

VARIABLE COST
 $42.25
OF 1 COMPOSITE UNIT
CONTRIBUTION MARGIN
This measure is used to determine how much of each sale contributes to covering
fixed costs and ultimately to the profit of the business.

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

$73 - $42.25 = $30.75

BREAK EVEN POINT
Break Even Point = Total Fixed costs/ Contribution Margin per unit
$145,000 / $30.75 = 4,715.45 units
= 4,715 units
The break-even point is the point at which no profit or loss occurs because Total
Cost = Total Revenue.
In this case ABC Ltd. will break even when it sells 4,715 composite units.
Determining how many of each product ABC ltd needs to sell :

BUILDER
23577.25 23577
GRADE

ACRHITECTURAL 14146.35 14146

RESTORATION 9430.9 9431

TOTAL UNITS   47154

Thank
you!!