Student

Tutor

Course

Date

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 8^{th} 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 8

^{th}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*(4

^{th}Ed.). New York, NY: Pearson Publishers. (2014). Print.

Horngren, C., et al.

*Introduction to Management Accounting*(15

^{th}Ed.). Upper Saddle River, NJ: Prentice Hall. (2010). Pri