14 March 2022
Instructions:Answer the five questions below.They focus entirely on improving the EBITDA of Largo Global Inc.(LGI)basedontheinformationprovidedintheExcelworkbook.ProvidesupportforyourreasoningfromthereadingsinProject3,Step1,and the discussion in Project3,Step3.Be sure to cite your sources in APA7thed.style.
Provide a detailed response below each question.Use12-pointfontanddoublespacing.Maintaintheexistingmarginsinthisdocument.YourfinalWorddocument,including the questions,should not exceed five pages.Includeatitlepageinadditiontothefivepages.Anytablesandgraphsyouchoosetoincludeareexcludedfromthefive-pagelimit.Name your document as follows:P3_Final_last name_Report_date.
You must address all five questions and fully use the information on all tabs.
Youarestronglyencouragedtoexceedtherequirementsbyrefiningyouranalysis.ConsiderothertoolsandtechniquesdiscussedintherequiredandrecommendedreadingforProject3.Thismeansexplaining whathappenedintheyearforwhichdatawasprovidedtomakerecommendationsfor LGI.
1. Howmuch o fthe fixed costswereallocatedbetweentheStandard andDeluxe Boxes based on the Lumpsum Allocation Method?IstheCEO correctthatLGIisnot contributing much to company profit? PleaseelaborateonyouranswerandincludeevidencefromTab1oftheExcelworkbook.
Using the Lumpsum Allocation Method, the fixed cost for the standard and Deluxe boxes were $ 120 and $ 36, respectively. Besides, the contribution margin of the two products was $ 950.40 and $ 153.00 for Standard and Deluxe Box, respectively.
$ Standard Boxes $ Deluxe Boxes
Contribution $ 950.40
Fixed Cost $ 120.00
From the data given in the table above, the company’s CEO is correct to say the Deluxe boxes are not contributing much to the company’s profit. The profit from the Standard boxes is 40.90%, while that of Deluxe boxes is 22.81%. However, based on the Lump-sum allocation method used by LGI to allocate the fixed cost, the company should continue producing both products despite the small contribution margin of Deluxe. Any attempt to discontinue the production of Deluxe boxes may result in a decrease in the overall contribution and profits of the company because the exact fixed cost will still be incurred regardless of the volume of production.
2. Theintern suggested splittingthecosts based on sales volumes,asyouhavedoneinthecalculationsperformedinTab2. Explain the impact of the calculationperformedinTab2. Inyourdiscussions,please elaborate on why the answer has changed from the calculations you performed in Tab 1. Also, indicatethebenefitofaccuratecostingwhentryingtoimproveprofitmargins.
The calculation is done in Tab 2, in which the fixed cost has been allocated based on the sales volume, has increased the profit and contribution from the Deluxe boxes. Based on this method of allocating the fixed cost, the profit margin of Deluxe has increased from 22.81% to 25.48%. The profit margin results have changed from those in Tab 1 because, in Tab 1, the fixed cost were not assigned based on the sales volume; thus, Deluxe boxes shouldered some fixed cost consumed by Standard boxes. Accurate costing is critical when the company wants to increase profit because it will enable the firm to understand the and reduce or eliminate them to boost profits.
3. BasedonthecalculationsinTab3usingABC,commentontheprofitsmadeforeachproduct.Explaininyourreportwhyprofits havechangedunderABCcostingmethod.Alsoindicatewhichofthe systems that is, the traditional systems (using lumpsum or volume-basedcost allocation in Tab 1 and Tab 2) orthe ABC systems (Tab 3)providethebestanswersfordecisionmakingtoimprovecostmanagement improveEBITDA.
When Activity Based Costing is used to calculate the profit generated from the sale of standard boxes and deluxe boxes, the profit from standard boxes increases to $ 933.56 while that from the sale of deluxe boxes reduces to $ 13.84.The profit has changed under the ABC method because the method usually allocates the on activities. This method has led to an increase in the fixed cost of Deluxe to $ 139.16 and a decrease in the fixed cost of standard boxes to $ 16.84, thus reducing the profit of Deluxes and increasing the profits of Standard boxes.
ABC costing method provides a more accurate valuation of production or sales cost because it assigns the variable cost based on the activity level. ABC method helps to identify various cost drivers and provides insight to the managers on the activities that consume more cost. This information is critical for the managers to and boost EBITDA since controls will be taken to make significant cost drivers effective. On the other hand, the traditional costing method uses a single cost driver in assigning the cost. Thus managers cannot understand other cost drivers making cost management more challenging and complex.
4. The sustainability manager is concerned about the Anti-Deluxe Action groups impact on the company and suggested that the materials and process of making the Deluxe Boxes should be changed. As making the will be less intensive, a suggestion is made that the sellingprice forthe Sustainable Deluxe Boxes could be $23 per unit. ? ProvideevidencefromtheExcelworkbook,Tab4.
Changing the price of deluxe to $ 23 will be a viable option for the company since it will result in more sales of the standard boxes, thus increasing its overall profitability.
From the data in Tab 4, when the price of sustainable deluxe boxes is changed to $ 23, the overall profitability of LGI increases from 37% reported in Tab 3 to 44% reported in tab 4. When the new price policy is implemented, the company’s total profit increases from $ 947.40 to $ 1066.06. Therefore LGI should implement the proposed pricing policy to boost profitability.
5.IfLargoGlobalInc. decides to sell the Sustainable Deluxe Boxes at the price the CEO demands to maintain the same profit percentage as for Standard Boxes, do you think the new price calculated in Tab 4 is a viable option? Why is it essential for LGI to know what their Break-even quantity is? Also, indicate whichother (non-numericalinformation) shouldbeconsidered when pursuing the Sustainable Deluxe Box option.
If LGI implements the new pricing policy, the company will maintain the same profit percentage of standard boxes computed using the ABC costing. Under the ABC costing, the profit percentage for standard boxes was 45.98%, the same as the percentage profit under the proposed pricing policy. LGI needs to know the break-even quantity because the break-even show quantity shows the level of sales of products that the company will not be making a profit or loss. The break-even quantity enables the LGI Company to know the level of production that will cover all costs of operation.
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