MANAGEMENT ACCOUNTING ASSIGNMENT 1

GROUP 24

Group No 24 Page 1

PRESTIGE TELEPHONE COMPANY

Solution to Question No 2

Intercompany Revenue 205*40082000

Variable Cost 205*5611480

Fixed Cost 212939Net Income(Intercompany) -142419

Contribution Margin ( Commercial) = 744 that is (800-56)

The loss from intercompany operations should be covered by the income from commercial operations = 142419/744

=191.42 (rounded off to 192)

Revenue from Commercial Sales = 800*192

= $153600

Solution to Question No 3-a,b,c,dCVP ANALYSIS

SCENARIOS

Jan Feb MarTOTAL AVERAGE 3A 3B 3C

Revenue HoursIntercompany 206 181 223 203.3333 205 205 205

Commercial 123 135 138 132 92.4 171.6 171.6Revenue from Intercompany 82000 72400 82000 82000 82000 82000Revenue from commercial 98400 108000 110400 92400 102960 137280Total revenue 180729 180716 192761 174400 184960 219280Variable Cost 56 56 56 56 56 56Total variable cost

18,424

17,696

20,216

16,654.40

21,089.60

21,089.60

Contribution 162305 163020 172545 157,745.60

163,870.40

198,190.40

Fixed Cost 212953 212018 212939 212636.7 212636.7 212636.7 212636.7

Group No 24 Page 2

Profit/loss -50648 -48998 -40394 (54,891.10)

(48,766.30)

(14,446.30)

Solution to Question No 1 and 4

There is a fundamental flaw in evaluating the financial performance of the subsidiary company.

Even though, the companies are treated as independent of each other, the services offered by the subsidiary company to the parent company is at a concessional rate which is half of that of the prices of the commercial services. Hence, evaluating the company based on this rate would give a negative performance. Hence, the inter-company services prices should be evaluated at arm’s length price.

If evaluated on the basis of arm’s length price, the result would be as follows:

CVP ANALYSIS AT ARM'S LENGTH PRICESCENARIOS

Jan Feb MarTOTAL

AVERAGE 3A 3B 3C

Revenue Hours

Intercompany 206 181 223203.333

3 205 205 205Commercial 123 135 138 132 92.4 171.6 171.6Revenue from Intercompany 82000 72400 82000 205000 123000 164000Revenue from commercial 98400

108000

110400 92400 102960 137280

Total revenue18072

918071

619276

1 297400 225960 301280Variable Cost 56 56 56 56 56 56Total variable cost

18,424

17,696

20,216

16,654.40

21,089.60

21,089.60

Contribution16230

516302

017254

5

280,745.60

204,870.40

280,190.40

Fixed Cost21295

321201

821293

9212636.

7 212636.7 212636.7 212636.7

Profit/loss-

50648-

48998-

40394 68,108.90

(7,766.30)

67,553.70

Hence, it is the pricing between the companies that influences the results of the company thus after consideration of the reported costs and relevant costs.

Group No 24 Page 3

WORKINGS1. The cost incurred by the company can be classified into fixed cost and variable cost.

VARIABLE COST

As per the data given in the case the variable costs are: Operations costs (semi variable). Material Cost Cost of Power

Hourly Help Rate

Computing the variable portion of the semi-variable cost:

Operation Wages in March : 30264

Operation Wages in February: 29184

Difference in wages = 30264-29184

=1080

Running hours in March : 361

Running hours in February: 316

Extra hours paid in March as compared to Feb: =361-316

= 45

Thus the cost of hourly help =1080/45 = $24

Group No 24 Page 4

Cost of Material

We calculate the hourly material cost per hour and assume the average for CVP analysis .

Material Cost No of hours Cost per hour

January 9031 329 27.44

February 8731 316 26.78

March 10317 361 28.5

Average Cost of Material = (27.44+26.78+28.5)/3=$27.5

Hourly Rate of Power

Here we would average the cost of Power for January, February and March.

Monthly Rent No of hours Cost per hour

January 1633 361 4.5

February 1592 348 4.5

March 1803 393 4.5

Average power cost = $ 4.5

Total Variable Cost : 24+27.5+4.5

=$56

Group No 24 Page 5

Contribution Margin

Following is Contribution Margin for Commercial Services:

Revenue 800Variable Cost:Variable Operation Charges 24Power Charges 4.5Material Cost 27.5Contribution Margin 744

FIXED COSTCost of operations is a semi variable cost since it includes salary paid to six persons working round the clock as wells as amounts paid hourly.

Since we have calculate $24 as variable cost of operations , the rest would be fixed Cost

Fixed cost of operation = 30264-24*361 or 29184-24*316 or 29496-24*329

=$21600

Fixed Cost calculation

Space Costs

Rent 8000

Custodial services 1240

Equipment Cost

Computer leases 95000

Maintenance 5400

Depreciation

Computer equipment 25500

Office equipment and fixtures 680

Wages and Salaries

Operations 21600

Group No 24 Page 6

Systems development and Maintenance 12000

Administration 9000

Sales 11200

Sales Promotions 8083

Corporate Services 15236

Total Fixed Cost 212939

We know at Break even point Total Revenue = Total Expenses.

Total Revenue = Intercompany Revenue + Commercial Revenue

Group No 24 Page 7