Accounting 403 Mod 4 SLP – Managerial Accounting – Budgeting

| November 9, 2018

Managerial Accounting – Budgeting
Differential analysis involves knowing which costs are
relevant, i.e. future costs that vary among alternatives. It is important to
know what information to use and not just how to execute the analysis.
Below find production and sales information for Lewis
Company.

Product information

Prod B

Beginning inventory

0

Units produced

10,000

Units sold

9,000

Selling price per unit

$300

Variable costs per unit

Direct material

120

Direct labor

60

Variable overhead

40

Variable selling and administrative

10

Fixed costs

Fixed manufacturing overhead

250,000

Fixed selling and administrative

100,000

Lewis Company

Absorption Income Statement

For the period ending Dec. 31, 2015

Sales

$2,700,000

Cost of goods sold

2,205,000

Gross profit (margin)

$495,000

Selling and administrative expenses

190,000

Net income

$305,000

Lewis Company receives an offer to make a new product,
called C, for a new customer. The customer wants to buy 1,100 units. Product C
has the same cost structure as product B with three exceptions. The new
customer is only willing to pay $260 per unit, direct materials costs will
decrease by $10 per unit and Lewis does not have to incur any variable selling
and administrative expenses.
•Make a list of the expenses and amounts that are relevant
for this decision. How much with the sale of this product contribute to the
profitability of Lewis?
•What if the company only pays $210 per unit? How does this
change the contribution towards profitability?
•If you were the manager, would you accept this order? What
considerations, other than financial would enter into your decision?

Two to Four page explanation.

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