a case study

Michael Benedicto
Ron Cajayon
Shirley Marie Ferrer
Kenneth Yumang
Agenda

 Company overview

 Characters in the case

 Areas of Consideration

 Statement of the Problem

 Possible Solutions

 Conclusion / Recommendation
Company Overview

Contact Global
Premier producer of Global Positioning System (GPS)
Devices. Recently hired a new CEO to pave its way on a
better product quality and promote stronger business
structure.
Characters
Not Guochang Li’s real picture

Contact Global
CEO – Guochang Li
Company Managers

Not the managers’ real picture

Areas of Consideration

CEO’s Priorities
- Restore employee morale
- Prepare a sensible annual budget

Basic Budget Data

Absorption Income Statement
BOD $2M Profit Goal
$10-25k Bonuses for top managers
Areas of Considerations
Basic Budget Data
Areas of Considerations

Absorption Income Statement

Statement of the Problem

1. Assuming that the company does not build up its

inventory (i.e. P = S) and its selling price and cost structure
remain the same, how many units of the GPS device
would have to be sold to meet the net operating income
of $2,000,000.00?
Possible Solution/s
Possible Solution/s

Consider the variable column

first; total cost per unit of
$77.20
Then get the no. of units to be
sold with the desired NI of
$2,000,000.00
Statement of the Problem

2. Verify your answer to (1) above by constructing a

revised budget and budgeted absorption costing income
statement that yields a net operating income of
$2,000,000?
Possible Solution/s
Possible Solution/s

Get the total product cost per unit first considering the FOH of
410,000 units
Then substitute it as the production cost on our absorption
income statement. The same target NI will be its result.
Statement of the Problem
3. Unfortunately, by October of the next year it had become clear that the
company would not be able to make it the $2,000,000 target profit. In fact,
it looked like the company would wind up the year as originally planned,
with sales of 400,000 units, no ending inventories, and a profit of
$1,672,000.00.
Several managers who were reluctant to lose their year-end bonuses
approached Guochang and suggested that the company could still show a
profit of $2,000,000. the managers pointed out that at the present rate of
sales, there was enough capacity to produce tens of thousands of additional
GPS devices for the warehouse and thereby shift fixed manufacturing
overhead costs to another year. If sales are 400,000 units for the year and
selling price and cost structure remain the same, how many units would
have to be produced in order to show a profit of at least $2,000,000 under
absorption costing?
Possible Solution/s
The situation will picture a sales of $48,000,000 (400,000 units @ $120). From this
sales, a $2,000,000 profit will be generated by a method of working back or squeezing
can be utilized to determine how many units must be produced to shift a part of the
fixed overhead to the next period.
Starting from the Net Income, we know that fixed selling and administrative expense
does not change even if there is a change in production level, while variable selling
and administrative expense is based on the actual unit sold in a period. Therefore, by
working back, we can add these expenses to the Net Income to arrive at a Gross Profit
as follows:
Possible Solution/s
We know that Sales less Cost of Sales is Gross Profit. But in this case, we do not know
our cost of sales yet because we are still looking for its component. However, since we
already have the sales and gross profit figures, we can determine the cost of sales.

Cost of Sales is the cost of actual units sold. Therefore, cost of sales divided by the
units sold is the cost per unit.
Possible Solution/s
From the given data on cost per unit, the fixed manufacturing overhead can be
computed.

Total fixed overhead of $6,888,000 is already given in the problem. Since the fixed
overhead per unit was determined already, the total units shared on the total fixed
overhead can be computed as follows:
Possible Solution/s

Production and Ending Inventory can now be computed using Total

Units Produced and Cost/Unit
Statement of the Problem

4. Verify your answer to (3) above by constructing an

absorption costing income statement.
Possible Solution/s
Conclusion / Recommendation
Thank you