Accounting for Decision Making

EVALUATE PAUL PECOS ' DECISION RULE

The company may increase production to yield more profit . As mentioned Pecos has the capacity to produce 20 ,000 units . The 300 wholesale price can still be reduced if production is higher than 10 ,000 units because fixed cost remains constant regardless of its production . This means that fixed cost per unit decreases as volume increases and net income also increases

Selling Price per unit must be regularly reviewed and evaluated . Base on Paul 's actual production of 11 ,000 units , fixed cost is reduced by

4 .10 / unit which is 9 lower than what Lester Ledger has computed , so therefore , the minimum wholesale cost can also be lowered to 295 /unit 245 .90 x 120 ) without decreasing net profit . Likewise , the 300 units of Sam Smoothtalk can be accepted

EVALUATE PAUL PECOS ' REACTION TO MS . GOODPERSON 'S SALE

The 700 units from a new distributor is really advantageous to the company because it will increase the net income of Pecos Printers , Inc for the reason that whether they accept the or not , the fixed overhead cost of 450 ,000 /yr will remain the same . To wit

Comparative Income Statement

VOLUME (units ) SP /unit w / 700 units w /o 700 units

Sales 925 300 277 ,500 277 ,500

700 290 203 ,000 -Less : Variable Cost

Direct cost 925 205 189 ,625 189 ,625

700 205 143 ,500 - - Contribution Margin 147 ,375 87 ,875

Less : Fixed Cost

FOH /mo 37 ,500 37 ,500

NET INCOME 109 ,875 50 ,375

CONTRIBUTION MARGIN INCOME STATEMENT FOR THE MONTH

PECOS PRINTERS , INC

INCOME STATEMENT

For the month ended ______

Existing Rule Proposed Rule

Selling Price /unit 300 295

Sales Volume (units ) 925 1 ,825

Sales 277 ,500 538 ,375

Existing Rule Proposed Rule

Less : Variable Cost

Direct Materials 115 ,625 228 ,125

Direct Labor 46 ,250 91 ,250

Overhead 27 ,750 54 ,750

br Contibution Margin 87 ,875 164 ,250

Less : Fixed Overhead Cost 37 ,500 37 ,500

NET INCOME 50 ,375 126 ,750

RECOMMENDATION

Pecos Printers , Inc . must utilize their maximum capacity by producing more units ( up to 20 ,000 units ) because doing so would yield more profit . Increased production units will mean decrease in Fixed Overhead Cost per unit resulting to increase in Net Income . Likewise , if cost /unit decrease , selling price per unit (20 mark-up on manufacturing cost ) will also decrease which is the main concern of Pecos - to keep the retail price below the industry top

REFERENCE

Anthony , R ,Reece , J Hertenstein , J (1995 . Accounting : Text and Cases (9th ed .Chicago : Irwin publishing . PP 51-60

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Accounting for Decision Making...