The report of Bionic Science Plc reflects a comprehensive outlook of the cost and profitability of doing a special project ordered by a client of the company. The special projects involve of production of modified robots that are to be exported to the client. The strategy of the project involves the cost analysis of the company for doing the particular project and its implications and profitability for venturing into the project. It also includes evaluating the cost factors and profitability analysis of the project.
The report states the profitability factor of the company if it does not do the particular project and the profitability factor if it does the project.
The report perceives the relevant and irrelevant cost analysis of the project and indicates the budgeted profit and sales revenue for venturing into the project.
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The report of Bionic Sciences Plc. highlights the cost analysis of the special project order by the client of the company. It reflects several relevant and irrelevant cost analyses that are done to decide the validity of the order. The cost analyses are calculated to highlight the profitability and productivity of the company for venturing into the special order made by the client.
Relevant Cost Analysis of Special New Order
The advice to the Board of Directors about the relevance of acceptance of the order is as follows:-
In considering the relevant cost of a business sunk costs are to be excluded. As pointed out by Sullivan et al.(2014, p. 10) the different types of relevant costs that are included in taking this decision are:
Future or upcoming cash flows: Costs that cannot be avoided in the upcoming period for taking the decision. As stated by Arnold et al. (2015, p. 230) it means future expenditures that the company has to incur for taking the decision.
For relevant costs, some decisions such as additional production, additional processing decisions, and pricing decisions are necessary to be taken into account.
Relevant costs
The above future costs are allocated as relevant and irrelevant costs of the business for doing the special project.
Future costs such as production overheads are necessary and cannot be avoided for accepting the order as the robots ordered by Big Store Inc are compulsory to have modifications. As stated by Coates (2014, p. 882) this will involve additional fixed costs for production of such modified robots for future perspective. To make the productions special equipment is needed for the operations. So in the future incremental costs of W$15,000 is needed for the production of the modified robot for the organization.
A special component of 100 units is required for the production of robots that are specially ordered by Big Store Inc. This will cost W$30000 to the company. The special component is purchased earlier by the company but has been regarded as a surplus of the company and has been fully written off. The company has 1000 units of these components it will use 100 units for the order and sell the rest 900 units for $300 per unit.
The company has to train its staff to produce specially modified robots. For training its staff the company has to incur an extra of W$5000 which is an incremental cost for the company that cannot be overlooked.
To produce the specially modified robots ordered by Big Store Inc the company has to create a project manager for production purposes from the existing staff. Therefore the company has to recruit additional staff for production which will cost the company W$10000 this is the extra cost that is to be incurred by the company for production purposes.
Irrelevant costs
The project requires factory spaces that are sitting idle and are meant to be sub-let. The space cost is irrelevant from the perspective of the production of robots which amounts to W$30000. This is a non-cash expenditure for the company as the company will use its free space for the production of modified robots.
To cover the company’s existing direct labor and production overhead costs the company earlier allocated W$1200 per unit, but later found that the costs are to be regarded as fixed costs for production purposes. So this cost is irrelevant as this is the sunk cost of the company which cannot be altered.
The expenses of the company for hiring sales staff for meetings with executives of Big Store Inc. This is the committed cost for the company that cannot be overlooked so this cost is irrelevant for the production purpose.
The classifications of relevant and irrelevant costs are necessary for the company to decide the actual cost of doing production of a particular job. As referred by Dakin et al. (2015, p. 1262) the classifications and identifications of the types of cost is necessary to plan the company for future productions and to stress the management of more relevant cost for doing production (refer to Appendix 2).
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Cost analysis:
Profitability analysis: The profitability analysis is done to analyze the profit of the business for taking the project. As stated by Dip et al. (2015, p. 1840) this analysis is important as it directly relates to the profit and income of the business if the company takes up the respective project. As stated by Kimura et al. (2015, p. 40) it shows the income of the company that is generated for not doing the specific project.
Market capitalization: Market capitalization is the share of the market and customers that the company has. As opined by Baltes et al. (2015, p. 5) exporting the products to another country will increase the potential market share of the company and profitability. It will create a huge opportunity if the company successfully exports the products to another market (refer to Appendix 3).
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(refer to Appendix 4).
Table with results given below:
| particulars | amount | |
| Sales Quantity (units) | 2200 | |
| Production Quantity (units) | 1700 | |
| Sales Revenue | 9050674.67 | |
| Cost of sales | 5733000 | |
| Gross Profit | 2499000 | |
| R&D | 468000 | |
| Marketing | 115000 | |
| Administration | 278000 | |
| Overheads | 961000 | |
| Operating profit | 677000 | |
| Profit before tax | 608000 | |
| Tax | 56000 | |
| Profit after tax | 552000 |
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The company should not accept the order of Big Store Inc. as it will create a loss for the company. To produce specially modified robots ordered by the client Big Store Inc. the company will incur huge amounts of losses, and the loss of the company will not be easily overcome. So it is best not to accept the special order of Big Store Inc.
The cost analysis report of the company reflected the relevance of the special project ordered by the client. This report made a clear view of the relevant and irrelevant costs that are included in manufacturing the special project. It gives a clear view of the profitability of the company for venturing and investing in this project.
Arnold, U. and Yildiz, Ö., 2015. Economic risk analysis of decentralized renewable energy infrastructures–A Monte Carlo Simulation approach. Renewable Energy, 77, pp.227-239.
Baltes, N., Dragoe, A.G.M. and Ardelean, D.I., 2015. Study regarding the determination of the financial performance of a company through market rates. Studia Universitatis Vasile Goldis Arad, 24(3), pp.1-10.
Coates IV, J.C., 2014. Cost-Benefit Analysis of Financial Regulation: Case Studies and Implications. Yale LJ, 124, p.882.
Dakin, H., Devlin, N., Feng, Y., Rice, N., O’neill, P. and Parkin, D., 2015. The influence of cost‐effectiveness and other factors on nice decisions. Health economics, 24(10), pp.1256-1271.
Dip, F.D., Asbun, D., Rosales-Velderrain, A., Menzo, E.L., Simpfendorfer, C.H., Szomstein, S. and Rosenthal, R.J., 2014. Cost analysis and effectiveness comparing the routine use of intraoperative fluorescent cholangiography with fluoroscopic cholangiogram in patients undergoing laparoscopic cholecystectomy. Surgical endoscopy, 28(6), pp.1838-1843.
Kimura, T., Shiomi, H., Kuribayashi, S., Isshiki, T., Kanazawa, S., Ito, H., Ikeda, S., Forrest, B., Zarins, C.K., Hlatky, M.A. and Norgaard, B.L., 2015. Cost analysis of non-invasive fractional flow reserve derived from coronary computed tomographic angiography in Japan. Cardiovascular intervention and therapeutics, 30(1), pp.38-44.
Osadchy, E.A. and Akhmetshin, E.M., 2015. Development of the financial control system in the company in crisis. Mediterranean Journal of Social Sciences, 6(5), p.345-400.
Sullivan, S.D., Mauskopf, J.A., Augustovski, F., Caro, J.J., Lee, K.M., Minchin, M., Orlowski, E., Penna, P., Barrios, J.M.R. and Shau, W.Y., 2014. Budget impact analysis—principles of good practice: report of the ISPOR 2012 Budget Impact Analysis Good Practice II Task Force. Value in health, 17(1), pp.5-14.
| Total Relevant Costs | for the year 2032 | |
| particulars | amount | |
| Additional fixed production | ||
| overheads required for modifications | ||
| of robots and to hire special equipment. | W$15000 | |
| special components 1,000 units | (100*300) | W$30000 |
| Research and development spending | W$300000 | |
| Staff training | W$5,000 | |
| Advertisement spendings | W$15000 | |
| Wages and salaries of Additional production employees | W$10000 | |
| Factory space | W$30,000 | |
| Fixed costs (direct labor & productions overhead costs) | (W$1200*100) | W$120000 |
| Sales overhead | W$5,000 | |
| Total Relevant costs | W$530000 | |
| Total Revenues from the special order | ||
| Sales (100 units * W$4,000 per unit) | W$400000 | |
| Loss | W$130000 | |
Calculations of total relevant costs:
| Relevant Costs | Irrelevant costs | |||||
| particulars | amount | particulars | amount | |||
| production | factory space | 30000 | ||||
| overheads | 15000 | |||||
| Direct labor | ||||||
| special component | 30000 | production overhead | 120000 | |||
| staff training | 5000 | sales overhead | 5000 | |||
| additional | 10000 | |||||
| production employee | ||||||
| total relevant costs | 60000 | total irrelevant costs | 155000 | |||
|
Sales: W$400000 Profit: W$340000
|
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c)
| Alternative Income | |||||||
| Income if the company does not do the project | |||||||
| particulars | amount | ||||||
| Sales of Special components | (1000 units*W$300 per unit) | W$300000 | |||||
| income from subletting | WS30000 | ||||||
| total | W$ 330000 | ||||||
| Profitability analysis for not incurring the respective project | |||||||
| Without considering the Irrelevant Costs | |||||||
| particulars | amount | ||||||
| Income if the company | |||||||
| does not do the project | W$330000 | ||||||
| Profit of the company | |||||||
| if it does the project | W$340000 | ||||||
| Net Profit | |||||||
| for doing the project | W$10000 | ||||||
| Considering the Irrelevant Costs | |||||||
| particulars | amount | ||||||
| Income if the company | |||||||
| does not do the project | W$330000 | ||||||
| Profit of the company | |||||||
| if it does the project | W$185000 | ||||||
| Net loss | |||||||
| For the project | W$145000 | ||||||
Decisions from Summary:
| particulars | 2030 | 2031 | 2032 | |
| R&D project numbers | No. 6 | No. 6 | No. 6 & 12 | |
| R&D spend (W$) | 300000 | 300000 | 900000 | |
| production quantity | 1600 | 1600 | 1600 | |
| production staff | 125 | 125 | 125 | |
| capital expenditure (W$) | None | None | None | |
| retail selling price (W$) | 5000 | 5050 | 5150 | |
| advertising spend (W$) | 10000 | 10000 | 15000 | |
| wages/salary rate (W$ pp pa) | 10000 | 9000 | 10000 | |
| training spend (W$) | 50000 | 50000 | 100000 | |
| number of shares issued | none | none | none | |
| price of shares issued | none | none | none | |
| overdraft limit (W$) | 1.5 m | 1.5m | 1.5m | |
| amount of bank loan (W$) | 1 m | 1 m | 1 m | |
| credit period for suppliers | 90 days | 90 days | – | |
| credit period for customers | 90 days | 90 days | – | |
| amount of position | N/A | 70000 | ||
| amount of accrual | n/a | n/a | ||
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