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A business decision to manufacture or stop the processing of a product is determined by the ability of the product to minimize its fixed costs as well as increase its profitability. In light of this, marginal and absorption costing are important in making prudent financial decisions (Braun and Tietz, 4-8). Whether a business manufactures or fails to manufacture, it must incur fixed costs, which may result in it making losses. In addition, most manufacturing processes require businesses to buy goods of up to a given order quantity (Horngren 28-32). Therefore, manufacturing at a level below the minimum order quantity results in businesses making losses since they have to absorb these costs.
Below is an assessment of the Strand Art Products
Canadian Buyer Offer
Plastic frames:
Cost Minimum order= 5000 pieces
Needs 36,000 pieces
Cost per frame= $0.6
Delivery time= two weeks
Die cost (Fixed cost)= $40,000/1,000,000= 0.04 per piece
Fixed cost= 36,000*0.04= 1,440
Credit terms= 45 days
Variable Costs 0.6*36000= $21,600
Total cost= 21,600+1,440=23,040
Mirror Cost
Size pf mirror (4ft* 8ft)= 36 square feet
Cost= 1.25 per square foot
Cost per piece is = (1.25* 36= $45)
Two weeks delivery time
Credit time is 45 days
Size of mirrors= (9”*12”)= 9/12*1=0.75 square foot
Order proposal= 36,000 pieces
Feet of glass needed= 0.75*36,000=27,000 square feet
1 piece of glass is 36 square feet
27,000 square feet is 750 pieces
Cost of pieces needed to meet this order (45*750= $33,750)
Cartons
Needs 36,000 pieces of mirrors @18 per carton
Number of cartons= 2000 cartons
Cost of cartons= ($1.0*2,000= 2,000)   (Variable cost)
Cost of die $2,000 (Fixed)
Set up cost $250 (Fixed)
Credit terms: cash on delivery
Miscellaneous cost= $0.08 per carton (0.08*2,000= 1,600)
Five weeks delivery time
Labor
Skillful craftsman= 6000 pieces a day (36,000 pieces is 6 days)
Wage is 27.75 per hr
Spends only 75% of his 8 hr day
Daily cost of artisan (0.75*8*27.75= 166.5)
For 6 days=$999
Low skill labor packers
Most efficient are 4 workers
Number of cartons per day= 175
To complete 2000 (2000/175=11.4286 days
11 days, 3 hrs, 26 min (2 week, 2 days (approx.) Since delivery is 3 days, the order can be met.
Cost of non-skill labor (4*11*11.4286*8=$4,022.8672)
Total Labor cost (4022.86+999=5021.867)
The order takes 3 days to ship.
Factory Overhead (Twice labor)
2*5021.867=$, 10,043.73
The order should arrive to the dealer by the 8th week.
 
 
 
 
 
 
Income Statement of Strand Art Products (Canadian Proposal)
Revenue (37.49*2,000)                                               74,980.00
Plastic Frames
Variable cost  $21,600
Fixed cost  $1,440
Mirrors
Variable Cost  $33,750
Cartons
Variable costs $2,000
Fixed cost
Die cost      $2000
Set up         $250
Miscellaneous $1600
Labor
Total labor cost $5021.867
Factory Overhead $10,043.73
Total                                                                                       (67, 661.867)
Gross Profits                                                                              7,318.13
 
 
 
 
 
Initial Proposal
$41.99 per carton (60 cartons)
Pieces (18*60= 1080 pieces)
Plastic frames:
Cost Minimum order= 5000 pieces
Needs 1080 pieces
Cost per frame= $0.6
Delivery time= two weeks
Die cost (Fixed cost)= $40,000/1,000,000= 0.04 per piece
Fixed cost (At least the minimum requirement)= 5,000*0.04= 200
Credit terms= 45 days
Variable Costs 0.6*5000= $3,000
Total cost= 3,000+200=3,200
Mirror Cost
Size pf mirror (4ft* 8ft)= 36 square feet
Cost= 1.25 per square foot
Cost per piece is = (1.25* 36= $45)
Two weeks delivery time
Credit time is 45 days
Size of mirrors= (9”*12”)= 9/12*1=0.75 square foot
Order proposal= 1080 pieces
Feet of glass needed= 0.75*1080=810 square feet
1 piece of glass is 36 square feet
810 square feet is 22.5 pieces (Therefore, 23 pieces)
Cost of pieces needed to meet this order (45*23= $1035)
Cartons
Needs pieces of mirrors @18 per carton
Number of cartons= 60 cartons (minimum batch is 501 pieces)
Cost of cartons= ($1.1*501= 551.1)   (Variable cost)
Cost of die $2,000 (Fixed)
Set up cost $250 (Fixed)
Credit terms: cash on delivery
Miscellaneous cost (Applicable to only cartons that are used)= $0.08 per carton (0.08*60= 4.8)
Five weeks delivery time
Labor
Skillful craftsman= 6000 pieces a day (1080 pieces is 0.18 of his worked day)
Wage is 27.75 per hr
Spends only 75% of his 8 hr day to make 6000 pieces
Daily cost of artisan (0.75*8*27.75*0.18= 29.97)
Skilled labor= $29.97
Low skill labor packers
Most efficient are 4 workers
Number of cartons per day= 175
To complete 60 cartons (60/175=0.3429 days)
Cost of non-skill labor (4*11*0.3429*8=$120.7008)
Total Labor cost (120.7008+29.97= 150.6708)
The order takes 3 days to ship.
Factory Overhead (Twice labor)
2*150.6708=$, 301.3416
The order should arrive to the dealer by the 8th week.
 
Income Statement of Strand Art Products
Revenue (41.99*60)                                             2,519.40
Plastic Frames
Variable cost  $3,000
Fixed cost  $200
Mirrors
Variable Cost  $1035
Cartons
Variable costs $551.1
Fixed cost
Die cost      $2000
Set up         $250
Miscellaneous $4.8
Labor
Total labor cost $150.6708
Factory Overhead $301.3416
Total                                                                     ( 7,492.9124)
Gross Loss                                                             (4,973.5124)
Conclusion
            The business should produce glasses at the proposed levels of 36,000 pieces in 2000 cartons at $37.49 per carton. At this production level, the business will make a profit of $7,318.13. If Brady produces at the level of 60 cartons at a price of $41.99, he will make a loss of 4,973.5124. Basically, the loss is because at the proposed production level the commodities will have to incur a high per unit costs due to fixed costs. In addition, there will also be a lot of waste due to the purchase of high volumes of minimum order quantities that will not be utilized. For instance, the business must purchase 501 cartons while it only needs 60 pieces.
 
 
Works Cited
Braun, K. and Tietz, W. Managerial Accounting (4th Ed.). New York, NY: Pearson Publishers. (2014). Print.
Horngren, C., et al. Introduction to Management Accounting (15th Ed.). Upper Saddle River, NJ: Prentice Hall. (2010). Pri