ACC 501 TU Mod 2 Accounting Transfer Pricing and Responsibility Center Presentation

TRANSFER PRICING AND RESPONSIBILITY CENTERS

Third part of the presentation. See background information for the Module 1 SLP.

Required:

Include the following items in your presentation.

Accounting Cost
Systems and Cost
Behavior
Air Filter for Ventilation Systems
Kendra R. Knuckles
Trident University International;
December 22, 2910
Air Filter
for
Ventilation
Systems
• For many years, the ventilation systems
have gained relevance in the offices,
industrial workplace, workstations and
even homes (Moreno et al., 2017).
• The demand for these systems is high,
due to clean air and health reason.
• Hence, the company can take
advantage of the change in market and
the competitive demand.
• For this to be achievable, one must
consider enhancement and market
changes so that its supply quality
products that customers will be
preferred.
THE FILTERS ARE USED TO
ENSURE THAT THE AIR
COMING THROUGH OFFICES
OR THE PLACE STORED IS
FREE OF EXTERNAL
COMPONENTS SUCH AS DUST,
VIRUSES OR POLLEN GRAINS
The Air
Filters
THE FIRM WILL, THEREFORE,
NEED TO MAKE
CONSIDERATION AND SET
ASIDE CAPITAL TO FUND
THEIR DEVELOPMENT.
THE COST ESTIMATES WILL
HELP IN CREATING A COSTEFFECTIVE PRICE APPROACH
STRATEGY FOR HIGH
QUALITY PRODUCTS.
THE EXTERNAL COMPONENTS
CAN HAVE SEVERAL SIDE
EFFECTS WHEN INHALED, AND
MOST PEOPLE CONSIDER THE
FILTERS SAFER AND HEALTH
SUPPORTIVE (MORENO ET AL.,
2017) BECAUSE OF THEIR ROLE
TO HELP PURIFY THE AIR.
WITH A GOOD COST
BEHAVIOR ANALYSIS, I WAS
ABLE TO PRODUCE THE
POSSIBLE COST ESTIMATES.
Cost Estimates of Air Filters
Cost element
Estimates(Cost per
Unit, S$)
Cost of materials
4.0
Cost of labor
8.0
Fixed Cost
3.5
Overhead cost
6.5
Total cost (per unit)
22.0
Cost Estimates
and Pricing
•
The production of
proposed air filtered
will fall under the
following cost
estimates (Agarwal &
Kickhöfer, 2018).
•
•
Pricing
suggestions
(1)
•
•
•
•
The total unit production cost for each filter is
roughly about $22.
The recommendation will be setting the price at
a range of $30 and a maximum of $35 would
will be set at fair price.
The price estimation is considering both the
customers and the company.
For the company, it will gain enough profits
through the set price.
The price also hands the cost of production to
customers as the profit will be the excess of
production costs (Cohen et al., 2016).
On the other hand, the cost is limited to $35 to
ensure that, the company will be providing the
product at prices customers can agree and
afford to pay.
• By increasing production, the company
can negotiate with the suppliers input of
materials so the cost of the parts will
decrease by $2 each unit and a similar
reduction in overhead costs with a $3
decrease.
Pricing
suggestions
(2)
• With such a decrease in the cost of
production, the overall production will
be expected to lower from $22 to $17.
• The effect will be an effect of
economies-of-scale.
• Finally, with such cost reductions, the
company will enjoy higher profits in the
end.
Cost-Volume Profit
(CVP) Analysis
• Ventilation
Cost-Volume Profit (CVP)
Assumptions
Costs are either variable or fixed
Sales price per unit, variable cost per
unit, and total fixed cost are constant
Mixed costs must be split into their
fixed and variable costs
The behavior of costs is essential for
CVP analysis
Example
Energy Recovery Ventilators
Price per unit: $500
Variable costs per unit: $300
Fixed costs of production: $80,000
$
$
$
Fixed Costs
Volume
$
Variable Costs
Volume
$
Variable Costs
Fixed Costs
Total Costs
Volume
The Break-Even Point
$
Equation Method
Break-Even point (sales dollars) = Variable Costs + Fixed
Costs + Profits
Break-Even
Point
Profit
Break-Even point (sales dollars) = Fixed Costs ÷ Contribution
Margin.
Margin of Safety = Total Sales – Break-Even sales
Target Profit
Unit sales = (Fixed Costs + Target Profit) ÷ CM per unit
Total Costs
Contribution Margin Method
Variable Costs
Fixed Costs
Volume
Energy Recovery Ventilators Example
Total
Per Unit
Percent
Sales (500 car seats)
$250,000
$500
100%
Variable Expenses
$150,000
$300
60%
Contribution Margin
$100,000
$200
40%
Fixed Expenses
$80,000
Income
$20,000
Contribution Margin Method For BreakEven Point
$80,000 ÷ 40% = $200,000 dollars in sales
Target Profit – $100,000
Margin of Safety
$250,000 – $200,000 = $50,000
20% of sales, or 100 units sold
Customer Profitability
($80,000 + $100,000) ÷ $200/unit = 900 units Annual profit/ customer x number of years
with company
Multi-Product CVP Model
Energy Recovery Ventilators
Exhaust Fans
Sales (500 units)
Total
$250,000
Percent
100%
Total
$300,000
Variable Expenses
$150,000
60%
$135,000
Contribution Margin
$100,000
40%
$165,000
Percent
100%
Ceiling
Total
Total
$550,000
Percent
100%
45%
$285,000
51.8%
55%
$265,000
48.2%
Fixed Expenses
$170,000
Income
$95,000
Sales Mix
55%
$550,000
$250, 000
100%
45%
$300,000
CVP Analysis Conclusion
Special Pricing for Customers and
Markets
–
Pricing strategies may be different
based on:
different markets
Customer profiles.
–
Prices may be revised based on:
Increased competition
Preventing new market
entrants
Company establishment in a
new market
CVP Overall Advantages and
Disadvantages
Advantages
– Helpful when making decisions
– Provides details on company
activities
Disadvantages
– Human errors
– Limitations for multi-product
companies
– Results in approximations
References
•
Agarwal, A., & Kickhöfer, B. (2018). The
correlation of externalities in marginal cost pricing:
lessons learned from a real-world case study.
Transportation, 45(3), 849-873.
•
Cohen, M., Lobal, I., & Paes Leme, R. (2016).
Feature-based dynamic pricing.
•
Moreno, T., Reche, C., Miguelina, M. C.,
Capdevielle, M., de Miguel, E., & Querol, X.
(2017). The effect of ventilation protocols on
airborne particulate matter in subway systems.
Science of the Total Environment, 584, 1317-1323.
Cohen, M., Lobal, I., & Paes Leme, R. (2016).
Feature-based dynamic pricing.
•
•
Moreno, T., Reche, C., Miguelina, M. C.,
Capdevielle, M., de Miguel, E., & Querol, X.
(2017). The effect of ventilation protocols on
airborne particulate matter in subway systems.
Science of the Total Environment, 584, 1317-1323.
•
Walther, L. (2017). Chapter 18: Cost-Volume-Profit
and Business Scalability