logo image

Paul Pecos Decision Rule Essay

Paul Pecos Decision Rule
Contribution at the present price set:

Selling Price                           $300 per unit

Direct Materials                     $125 per unit

Direct Labor                             $50 per unit

Variable Overheads                 $30 per unit

Contribution                             $95 per unit

From the contribution figure determined above, the organization can sustain a lower selling price of the product marketed.  However, one has to bear in mind that a positive contribution does not mean an overall profit.  The company is also required to cover the fixed costs in order to attain an overall net profit.  In case of idle capacity yet, a lower selling price is acceptable since a greater contribution will be made in such a stance, which will also enhance the profitability.

Evaluation of Ms. Goodpersons Sale
Contribution per unit                         $95

Fixed Cost per unit                            $45

Margin of Safety                               $50

Minimum price set by Paul Pecos      $300

Margin of Safety                               $  50

Actual minimum selling price            $250

Paul should be more careful in how to communicate with employees, especially in the case of Ms. Goodperson’s sale, since the price charged would still attain a profit.  Before trading drastic decisions it is important that financial information is sought.  For instance, in this case the selling price agreed by Ms. Goodperson will still generate a positive contribution, because it is

Need essay sample on "Paul Pecos Decision Rule"? We will write a custom essay sample specifically for you for only $ 13.90/page

higher than the $250 minimum selling price determined from the calculations above.

Contribution Margin Income Statements
Paul Pecos Decision

Contribution Margin Profit Statement
$
Sales Revenue (see note 1)
286,500
Variable Costs:

Direct Materials ($125 x 925)
115,625
Direct Labor ($50 x 925)
46,250
Variable Overheads ($30 x 925)
27,750
Contribution
96,875
Fixed Costs
450,000
Net (Loss)
(353,125)

Note 1 – Sales Volume and Revenue

Details
Selling Price

$
Volume
Sales Revenue

$
Sam Smoothtalk

  Offer 1

  Offer 2

310

305

200

150

62,000

45,750
Harry Hustler

  Offer 1

  Offer 3

  Offer 4

305

300

330

50

100

75

15,250

30,000

24,750
Gary Giftofgab

  Offer 1

  Offer 3

305

325

250

100

76,250

32,500

925
286,500

According to lowest selling price of $250

Contribution Margin Profit Statement
$
Sales Revenue (see note 2)
578,000
Variable Costs:

Direct Materials ($125 x 1,925)
240,625
Direct Labor ($50 x 1,925)
96,250
Variable Overheads ($30 x 1,925)
57,750
Contribution
183,375
Fixed Costs
450,000
Net (Loss)
(266,625)

Note 2 – Sales Volume and Revenue

Details
Selling Price

$
Volume
Sales Revenue

$
Glenda Goodperson

Offer Taken

290

700

203,000
Sam Smoothtalk

  Offer 1

  Offer 2

  Offer 3

310

305

295

200

150

300

62,000

45,750

88,500
Harry Hustler

  Offer 1

  Offer 3

  Offer 4

305

300

330

50

100

75

15,250

30,000

24,750
Gary Giftofgab

  Offer 1

  Offer 3

305

325

250

100

76,250

32,500

1,925
578,000

Recommendations to the Situation at Hand

Presently the organization is incurring substantial losses.  If the 20,000 targeted units sales are reached, the company would still incur losses.  However, such aim is appropriate since the losses will diminish.  However, an organization cannot remain active if recurring losses are incurred.  Thus the firm should adopt remedial actions that boost its profitability.  For example, the present machinery the firm holds could be used to manufacture other profitable products and thus enhance its profits.  Cost control measures should also be undertaken in order to control costs and remove expenditure that is not adding value to the organization.

Reference:

Drury C. (1996). Management and Cost Accounting. Fourth Edition. New York: International Thomson Business Press.

Can’t wait to take that assignment burden offyour shoulders?

Let us know what it is and we will show you how it can be done!
×
Sorry, but copying text is forbidden on this website. If you need this or any other sample, please register

Already on Businessays? Login here

No, thanks. I prefer suffering on my own
Sorry, but copying text is forbidden on this website. If you need this or any other sample register now and get a free access to all papers, carefully proofread and edited by our experts.
Sign in / Sign up
No, thanks. I prefer suffering on my own
Not quite the topic you need?
We would be happy to write it
Join and witness the magic
Service Open At All Times
|
Complete Buyer Protection
|
Plagiarism-Free Writing

Emily from Businessays

Hi there, would you like to get such a paper? How about receiving a customized one? Check it out https://goo.gl/chNgQy

We use cookies to give you the best experience possible. By continuing we’ll assume you’re on board with our cookie policy