To: The Board of Directors
Subject:Draft budget for 2013/14 and alternative strategies This is with reference to the board meeting held on 10th of October 2012, I have evaluated the draft budget and following four strategies which are under your consideration to enhance profitability of Sarika Ltd. (the Company) to meet its 20% return on capital. * Paul Burns's Proposal (Shut down of Product Z and sale of related machinery for £5k) * Bob Berry's Proposal (Reduction in sale price and variable material cost of Product Z by £1 and increasing its sale demand by 25%) * Ben Kates' Proposal (Overall increase in sales by10% without any other change) * Arthur Mitchell's Proposal ( Reduction in fixed labour cost of product Z by £75K, 10% increase in variable Overheads and reduction in per unit cost by £0.75*) I have used Marginal costing statements for the aforementioned evaluation because it is quite useful in for short term profit planning as compared to full cost statements due to following reasons: * For profit planning purpose, we need cost-volume-profit relationship data which is more readily available from marginal cost statement than fromull cost statements. * Since fixed cost is absorbed as a period cost, increasing or reducing production and difference in the number of units produced versus the number sold do not affect the per unit product cost. * Marginal costing statements are easily understandable for profit planning because they follow managements decision making process more closely than do full cost statements. * Marginal costing statements allow a more objective appraisal of income contribution of different products. * Calculation of product cost is more convenient, accurate and reliable by using marginal costing statements, because the basis to allocate fixed costs which involve estimates and personal judgments are eliminated.
* Marginal costing statements also facilitates following...