1. How much of the fixed costs were allocated between the Standard and Deluxe Boxes based on the Lumpsum Analysis Method? Is the CEO correct that the Deluxe Box is not contributing much to company operating profit? Please elaborate on your answer and include evidence from Tab 1 of the Excel workbook.
Based on the Lumpsum Analysis Method, the standard boxes and the Deluxe box have a total fixed cost of $156 million. A fixed cost of $ 120,000.00 (Million) was allocated for the production of standard boxes, and a cost of $36,000.00 (Million) was reserve for the production of deluxe boxes.
The CEO’s assumption that the Deluxe box has little impact on the company’s operating profit is incorrect. The operating profit is a company’s total earnings before taxes and short-term responsibilities. According to Lumpsum, Deluxe boxes contribute 63% of the company’s operating profit, while standard boxes contribute 41%. The company earns 63 cents on every dollar spent on deluxe boxes, accounting for 63% of the operating profit.
2. The intern suggested splitting the costs, as you have done in the calculations performed in Tab 2, based on sales volumes. Explain the impact of calculation performed in Tab 2. In your discussions, please elaborate on why the answer has changed from the calculations you performed in Tab 1. Also indicate the benefit of accurate costing when trying to improve operating profit margins.
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3. Based on the calculations in Tab 3 using ABC, comment on the operating profits made for each product. Explain in your report why operating profits have changed under ABC analysis. Also indicate which of the systems – that is the traditional systems (using lumpsum or volume-based cost allocation in Tab 1 and Tab 2) or the ABC systems, (Tab 3) provide the best answers for decision making to improve cost management in order to improve operating profit.
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4.The sustainability manger is concerned about the Anti-Deluxe Action group’s impact on the company and suggested that materials and process of making the Deluxe Boxes should be changed. As the process of making the Sustainable Deluxe Boxes, will be less intensive, a suggestion is made that the selling price for the Sustainable Deluxe Boxes could be $23 per unit. Discuss whether changing the price to $23 is a viable option for LGI? Provide evidence from the Excel workbook, Tab 4.
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5. If Largo Global Inc. 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 important for LGI to know what their Breakeven quantity is? Also indicate which other (non-numerical information) should be considered when deciding to pursue the Sustainable Deluxe Box option.
