1. The document analyzes the financial performance of a subsidiary telecommunications company that provides services to its parent company at concessional rates.
2. Evaluating the subsidiary based on these intercompany rates shows losses, but using an arm's length price shows profits. Pricing between the companies influences the results.
3. A contribution margin analysis and calculation of variable and fixed costs is provided under different scenarios using commercial and adjusted intercompany revenue figures.
1. The document analyzes the financial performance of a subsidiary telecommunications company that provides services to its parent company at concessional rates.
2. Evaluating the subsidiary based on these intercompany rates shows losses, but using an arm's length price shows profits. Pricing between the companies influences the results.
3. A contribution margin analysis and calculation of variable and fixed costs is provided under different scenarios using commercial and adjusted intercompany revenue figures.
1. The document analyzes the financial performance of a subsidiary telecommunications company that provides services to its parent company at concessional rates.
2. Evaluating the subsidiary based on these intercompany rates shows losses, but using an arm's length price shows profits. Pricing between the companies influences the results.
3. A contribution margin analysis and calculation of variable and fixed costs is provided under different scenarios using commercial and adjusted intercompany revenue figures.
1. The document analyzes the financial performance of a subsidiary telecommunications company that provides services to its parent company at concessional rates.
2. Evaluating the subsidiary based on these intercompany rates shows losses, but using an arm's length price shows profits. Pricing between the companies influences the results.
3. A contribution margin analysis and calculation of variable and fixed costs is provided under different scenarios using commercial and adjusted intercompany revenue figures.
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Group No 24 Page 1
MANAGEMENT ACCOUNTING ASSIGNMENT 1
GROUP 24
Group No 24 Page 2
PRESTIGE TELEPHONE COMPANY
Solution to Question No 2
Intercompany Revenue 205*400
82000 Variable Cost 205*56
11480 Fixed Cost 212939 Net Income(Intercompany) -142419
Contribution Margin ( Commercial) = 744 that is (800-56) The loss from intercompany operations should be covered by the income from commercial operations = 142419/744 =191.42 (rounded off to 192) Revenue from Commercial Sales = 800*192 = $153600 Solution to Question No 3-a,b,c,d CVP ANALYSIS SCENARIOS Jan Feb Mar TOTAL AVERAGE 3A 3B 3C Revenue Hours Intercompany 206 181 223 203.3333 205 205 205 Commercial 123 135 138 132 92.4 171.6 171.6 Revenue from Intercompany 82000 72400 82000 82000 82000 82000 Revenue from commercial 98400 108000 110400 92400 102960 137280 Total revenue 180729 180716 192761 174400 184960 219280 Variable Cost 56 56 56 56 56 56 Total variable cost
There is a fundamental flaw in evaluating the financial performance of the subsidiary company. Even though, the companies are treated as independent of each other, the services offered by the subsidiary company to the parent company is at a concessional rate which is half of that of the prices of the commercial services. Hence, evaluating the company based on this rate would give a negative performance. Hence, the inter-company services prices should be evaluated at arms length price. If evaluated on the basis of arms length price, the result would be as follows: CVP ANALYSIS AT ARM'S LENGTH PRICE
SCENARIO S Jan Feb Mar TOTA L AVERAG E 3A 3B 3C Revenue Hours Intercompany 206 181 223 203.333 3 205 205 205 Commercial 123 135 138 132 92.4 171.6 171.6 Revenue from Intercompany 82000 72400 82000 205000 123000 164000 Revenue from commercial 98400 10800 0 11040 0 92400 102960 137280 Total revenue 18072 9 18071 6 19276 1 297400 225960 301280 Variable Cost 56 56 56 56 56 56 Total variable cost
Hence, it is the pricing between the companies that influences the results of the company thus after consideration of the reported costs and relevant costs.
Group No 24 Page 4
WORKINGS 1. The cost incurred by the company can be classified into fixed cost and variable cost.
VARIABLE COST
As per the data given in the case the variable costs are: Operations costs (semi variable). Material Cost Cost of Power
Hourly Help Rate Computing the variable portion of the semi-variable cost: Operation Wages in March : 30264 Operation Wages in February: 29184 Difference in wages = 30264-29184 =1080 Running hours in March : 361 Running hours in February: 316 Extra hours paid in March as compared to Feb: =361-316 = 45 Thus the cost of hourly help =1080/45 = $24
Group No 24 Page 5
Cost of Material We calculate the hourly material cost per hour and assume the average for CVP analysis . Material Cost No of hours Cost per hour January 9031 329 27.44 February 8731 316 26.78 March 10317 361 28.5
Average Cost of Material = (27.44+26.78+28.5)/3=$27.5
Hourly Rate of Power Here we would average the cost of Power for January, February and March. Monthly Rent No of hours Cost per hour January 1633 361 4.5 February 1592 348 4.5 March 1803 393 4.5
Average power cost = $ 4.5 Total Variable Cost : 24+27.5+4.5 =$56
Group No 24 Page 6
Contribution Margin Following is Contribution Margin for Commercial Services: Revenue 800 Variable Cost:
Variable Operation Charges 24 Power Charges 4.5 Material Cost 27.5 Contribution Margin 744
FIXED COST Cost of operations is a semi variable cost since it includes salary paid to six persons working round the clock as wells as amounts paid hourly. Since we have calculate $24 as variable cost of operations , the rest would be fixed Cost Fixed cost of operation = 30264-24*361 or 29184-24*316 or 29496-24*329 =$21600 Fixed Cost calculation Space Costs Rent 8000 Custodial services 1240 Equipment Cost Computer leases 95000 Maintenance 5400 Depreciation Computer equipment 25500 Office equipment and fixtures 680 Wages and Salaries Operations 21600 Systems development and Maintenance 12000 Administration 9000 Group No 24 Page 7
