1. Given the products manufactured and sold at Grafton before Marcus got involved, what type of cost system should Grafton be using - job order or Process? Answer and explain how the system would work, be as detailed as you can.
2. Should Grafton as originally described use a normal cost system (actual direct material, actual direct labor, estimated overhead) or a standard cost system? Explain
3. Grafton makes custom furniture where no two products are the same. Thus producing a detailed sales budget would be impossible to develop. What you would need to do is budget sales in total considering the drivers of sales and projecting how they will change in the coming planning period. For example suppose spending on custom furniture is dictated by the level of disposable income. Thus if we expect disposable income to increase in our target demographic then sales will increase. Assume that disposable income in Florida is forecasted to increase by 4% during 2016. (The U.S Bureau of Economic Analysis and Trading Economics are good places to start looking at economic indicators: https://www.bea.gov/index.htm
https://www.tradingeconomics.com/united-states/disposable-personal-income/forecast
Last year's revenue was approximately $2,400,000 and Gross Profit was $1,000,000 which means Cost of Goods Sold was $1,400,000. Let's assume that of the Cost of Goods Sold $400,000 was direct material, $600,000 was direct labor and overhead was manufacturing overhead was $400.000. Of the overhead assume that variable overhead was $140,000 and fixed overhead was $260,000.
Assume that personal disposable income will grow 4% in 2016 and sales will increase by that same rate. Also assume that fixed manufacturing overhead will increase by $40,000 as the company buys new more efficient equipment and makes improvement in the facility. This change will lower the variable manufacturing costs (DM +DL + Variable MOH)from 47.5 percent of sales to 44% of sales but increase fixed MOH to $300,000. Assume no inventories.
Required: Show work.
a. What will the2016 Budgeted Sales Revenue be?
b. What will the 2016 Budgeted Variable Cost of Goods Sold be? Show the components
c. What will the budgeted gross profit percentage be?
d. What is the Budgeted Gross Profit?
4. Grafton made only custom, high end furniture, but Marcus wants them to add some furniture that is not custom, but quick ship. He suggests that they start with a line of chairs. He is using what's called target costing. With target costing you develop a target selling price. His price is $500. Then you deduct the desired margin, in this case it's 50% of the selling price. That gives you the cost of goods sold. In this case we'll assume that it's just the variable cost of goods sold is 50% (direct material 15% _ Direct labor 30% and Variable MOH is 5%). Assume they can make these chairs with no increase in fixed manufacturing costs.
Required
a. Are there other costs that could increase as they add this line? Explain.
b. Do you think this idea of having quick ship chairs is a good one? Explain?
5. Assume that the Variable Cost of Goods Sold is 50% of Sales and the Variable Selling and Administration costs are 20 percent of Sales. Also assume that fixed cost total $800,000.
Required
a. How much sales revenue does the company need to breakeven?
b. How much sales revenue does the company need to reach a target before tax profit of $600,000?
c. Assume the company has excess capacity and is considering an increase in advertising (fixed cost) of $100,000 that they believe will bring in additional sales of $300,0000. Should they have this increase in advertising? Explain your reasoning using numbers.
6. Marcus made his investment and is now one of the "people" at Grafton that make up the important "people, products, processes." He is introducing new products and helping to get those products into key accounts. He says he improved the processes and products, but with his presence in the company he also took the people factor up several notches. Do you think the company could have had the same results if they brought in a consulting company instead of Marcus? Explain.