Fifth edition Alnoor Bhimani Charles T. Horngren Srikant M. Datar Madhav V. Rajan Farah Ahamed


Quality improvement, relevant costs and revenues, service



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20.12 Quality improvement, relevant costs and revenues, service
. (25 min)
1
Additional costs of the new scheduling and tracking system are €160,000 per year.
2
Additional annual benefits of the new scheduling and tracking system areas follows Additional annual sales from improving on-time performance
€20,000
(95%
− 85%)
€200,000 Contribution margin from additional annual sales
45%
× €200,000 90,000 Savings invariable costs per year from fewer cartons Lost or damaged €60 (3,000 − 1,000)
120,000 Total additional benefits
€210,000


Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012
3
Since the expected benefits of €210,000 (requirement 2) exceed the costs of
€160,000 (requirement 1), Colombe-Déménagements should invest in the new system. Of course, these calculations assume additional sales and contribution margin from better on-time delivery performance. As long as additional contribution margin of €40,000 (costs of €160,000 – variable cost savings of
€120,000) can be realised (corresponding to additional sales of €40,000 ÷ 0.45 =
€88,889), investing in the new system is beneficial. Students might also suggest that considering only the variable cost savings as a result of fewer cartons being lost or damaged underestimates these benefits. Reducing the amount of lost or damaged cartons could enhance Colombe-
Déménagements’ reputation and could lead to higher sales and contribution margin. Other students might argue that the new system may also reduce the time required to transport goods (service quality measure (a. This too could lead to additional sales and greater contribution margin.

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