Prestige Case Study

Topics: Variable cost, Costs, Cost Pages: 2 (253 words) Published: November 24, 2013
﻿Prestige Case Study Accounting

Currently there are only two variable costs of the company, but as Anthony RN (2011 p476)) states when products have different unit contributions and when the product mix changes one approach to the C-V-P analysis is to treat each product separate entity and to construct a profit graph for that entity. A prestige data service provides a service and so the variable costs are only Power and labour rather then products who would have materials included. The variable unit cost of both entities was calculated from have the total variable cost below; 1. Power variable cost per unit =  \$4  total fixed costs is 200 2. Operation wages variable cost per unit= 24 total fixed costs is 21600 The company only has the ability to change variable costs by increasing or decreasing output, labour or price. Hence we need to calculate how much profit the commercial area is currently earning  to compare each possible alternative. To calculate Profit / income the following contribution formula should be used (Anthony RM 2011 p471); Income =(UR-UVC)* X –TFC

Power and utilities
UP -
UVC
Hours / units sold
TFC
Profit for commercial
Current situation
March
800
28
138
21800
84736
Scenario A
April
1000
28
96.6 (30% less)
21800
72095
Scenario B
April
600
28
179.4
30% increased
21800
80817
Scenario c
April
800
28
179.4
30% increased
21800
116669.8
Scenario
D
April
800
28
110.4 (reduced 20%)
21800
63428.8
As demonstrated Scenario C has produced the highest profit margin, which demonstrates potential for increasing profits. However this is dependent on Prestige increasing demand by 30% with only spending (116669.8- 84736 = ) \$31 933.8). Realistically this is a risk as there is no guarantee that any marketing manager can increase quantity demand, by increasing expenditure on promotions.

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