The pricing of any commodity takes into consideration several factors if indeed any gains are to be realized from that commodity. For instance, the charging of prices in food related products; several costs need to be taken into consideration. The process of production of ready-made food involves many processes from the initial purchase of the ingredients used in the preparation of food. The costs are either direct or indirect costs. Direct costs are those costs are those that can be apportioned to specific units while indirect costs cannot be apportioned to specific units. The costs incurred are also classified either in the form of fixed and in variable costs. The fixed costs in a hotel are in the form of rent, manager’s salaries among others. The location of a hotel will determine how much costs to be apportioned to the specific units.
The efficiency of production machines or equipment is viewed form cost-effective perspective. That is how the plants are capable of producing the required goods at the most possible minimal costs. The manager can use the cost of left over materials to assess the efficiency of a machine. An efficient machine or plant yields minimal or no leftovers since all the raw materials fed to the plant give out the expected output. If it happens that the cost of leftovers reflect a larger percentage of the raw materials consumed, this is a clear indicator of inefficiency of the machine or plant. Too much cost of left overs reflects that the company is incurring huge losses and its performance is likely to be affected.
The division controller of any organization is vested with the overall responsibility of ensuring that there is enough inventory and total cost controls in the section. That means he should be aware of all the cost aspects in the organization and develop a mechanism that will see that all the costs are adequately accounted for. The costs of products left in the inventory may be determined through taking the total number of units and multiplying them by the price per unit cost. However, the units may be having different prices and the different units left will be obtained by referring to stock taking records maintained for example Last in First out (LIFO), First In First Out (FIFO) or any other preferred method to get precise prices for the number of inventories left.
Sometimes it is essential that the future expenditures be planned presently. In the context in question, the maintenance department wants to plan the expenditures for the coming year. In managerial economics, the anticipated expenditures can be based on the organization’s cost history. The manager may also incorporate some aspects that may affect the anticipated expenditures for instance the unforeseen economic downturns like inflation may lead to increased expenditures in the anticipated year. The manager also has to consider other factors such as the expansion that may be anticipated by the firm. This may lead to increased costs on the part of the firm. The managerial accounting provides that the manager should be aware and able to anticipate costs that are likely to be incurred by the firm.
- Manufacturing margin as a percentage of sales for each salesperson:
Borland = (78,000/130,000) × 100 =60%
Chow = (60,000/150,000) × 100 = 40%
Juarez = (56,000/140,000) × 100 = 40%
Morion = (40,000/100,000) × 100 = 40%
- Contribution margin (CM) ratio for each sales person:
CM ratio = (Contribution margin/Sales) × 100, therefore;
Borland = (32,500/130,000) × 100 = 25%
Chow = (15,000/150,000) × 100 = 10%
Juarez = (14,000/140,000) × 100 = 10%
Morion = (10,000/100,000) × 100 =10%
Analysis of the results
Manufacturing margin is a measure of manufacturing capability of the company and efficiency during the production of goods. This is attributed to several factors for instance the skilled and experienced labor force of the company, use of more advanced machines in the production of goods and services among others. In the provided case study, the situation is different since we are examining three different sales people operating in the same company. Each sales person has a duty to contribute to the company through sales efforts. The efficiency of each sales person can be assessed in terms of manufacturing margin. In managerial accounting, the higher the manufacturing margin the more efficiency is the manufacturing firm and in the above context the person with the highest manufacturing margin is the person with substantial contribution to the company. Sales figures cannot be used to judge the efficiency of a person. For instance in the above calculations, though Chow has the highest sales figures, Borland is more efficiency since his manufacturing margin is the highest of all.
Contribution margin is the amount that remains after deducting variable expenses from the total revenue. The contribution margin is supposed to cover fixed costs and provide profits for the firm in a given period. In the event that an organization is unable to cover its fixed costs using the contribution margin, then losses are incurred. The CM ratio is considered useful in managerial accounting as it shows the effect that will be observed in contribution margin after a change in total sales. For instance, having a CM of 10 percent means that for every dollar increase in sales, the contribution will go up by 10 cents. The organization’s profits will also increase by 10 percent assuming fixed costs are constant. In the above analysis, it is evident that Borland had the highest contribution and therefore he makes a substantial contribution than other sales people. If the company is considering getting rid of some sales people, Borland should be retained since a given increase in sales will bring about a significant increase in the company’s profits. The analysis also shows there is a strong relationship between the manufacturing margin and contribution margin. A high manufacturing margin signifies a contribution margin.
In every organization, profit maximization and cost minimization is the contribution of all the organizations departments/divisions. This is only achieved if there is maximum cooperation of all the divisional heads involved. In the provided case study, a scenario arises that involves the divisional heads of the same organization, Michael of the PC Division and Lynn Williams of Semiconductor Division. The two associates of the same organization seem to be differing concerning the supply of some crucial raw materials required in the company. Firstly, Lynn is frustrated for not meeting the annual target and he is still looking for an alternative on how he can compensate for the same. He usually makes 100 percent of the Semiconductors sales to the external customers but now, he has only managed 80 percent and he is looking for alternatives on how to compensate for the remaining 20 percent. Despite the fact that the same raw materials are needed in the same organization and there is demand for the materials, there seem to be no solution to the problem. His counterpart’s behavior is so unethical since after realizing that Lynn has not met the target, he approaches him and requests Lynn to supply the materials at a price that is below the market price.
Assuming that Michael had to order the materials from an external supplier, he could have parted with $250 for 100 Semiconductors since this is the prevailing market price. Instead, he is requesting for price break from the Semiconductor division while fully aware that all the divisions are operating under very strict profit responsibility. This amounts to lack of cooperation amongst the key heads of an organization and it is as if Michael wants the other colleague’s division to fall. It is quite interesting that Michael opts to order the materials from outside where he is likely to incur other unnecessary costs like transportation costs that could have been saved if the materials were to be obtained from his own organization. Lynn’s reaction is a realistic one. He does not want to sell the raw materials below the market price since it will be against company’s policies. Even if it were not against company’s policies, this would not be possible since he will be answerable to any losses incurred because of his actions. Lynn is kind and fair enough to explain to his colleague and give him enough reasons why it is impossible to sell the materials at that price.
No organization can achieve its set goals without full cooperation of its departmental heads. This is because each department depends on one another either directly or indirectly to achieve its targets. For example, the sales and marketing department communicates with production department to ensure what is being required in the market is sufficiently produced. If production department produces poor quality products then it will amount to total failure to the sales and marketing division. In the event that some departments are relying on others for the supply of some required materials, they should not seek favor in the name of they are operating in the same organization. This is because some departments may fail to meet their targets if they decide to favor other departments in the same organization simply because they are within the same operating entity. If it is the issue of buying price, there should be nothing like price break to be requested since from an economic point of view price breaks are offered when a particular buyer buys goods in large quantities and it should not be an excuse for any buyer claiming he/she should be given exemptions.
Successful and well performing organizations have their employees or management staff who are willing to assist each other in solving any problem that arises in the organization. It is important for them to realize they are the part of their organization’s success and their efforts are very crucial as far as the existence of an organization is concerned. Lack of cooperation and unwillingness to help each other may affect the organization and it may be hard for it to achieve its goals and objectives. Therefore, it is imperative that the management staff possess excellent ethical behavior in addition to their competences.