INDEXExecutive Summary3Background3Recommending and justifying an appropriate cost analysis3New income statement - plant-wide overhead rate6New income statement - plant-wide overhead rate7Conclusion9Appendix A: Income Statements supporting information10Exhibit A: Sensitivity Analysis - unit and total contribution margins11Exhibit B: Sensitivity Analysis - contribution margin and lower limits of production12Exhibit C: Sensitivity analysis - contribution margin and upper limits of production13Exhibit D: Sensitivity analysis - hours of production14Executive SummaryThe objective of this report is to:*Build upon the results and calculations from our previous Bayview assignment and to creat ...view middle of the document...
This means that changes to the production numbers of these products impact the profitability of Bayview more than an equivalent change to Product B.Based upon our analysis, we believe that sales and marketing efforts be concentrated on those products for which the company is most vulnerable to fluctuating demand. The purpose therefore should be to ensure that lower levels of product fluctuation occur for these products. Our sensitivity analysis also proves that production operating constraints should be pro-actively managed so as to allow for more (or optimal) flexibility while producing these products.With respect to investment in plant capacity the company is most at risk to changes in molding capacity. Variation associated with molding capacity has the greatest impact on profitability and hence one would expect that investment in molding facilities would also have the greatest payback or value creation opportunity.Having analyzed the sensitivity reporting, our results produced the same optimum production mix when applying different overhead rates, although applying differing overhead rates generated different contribution margins (or operating incomes). This means that, even using same product mix, we can improve total contribution margin (or total operating income) by changing unit contribution margins (as coefficients of product quantities in the objective function when optimizing) or any of the components of unit contribution margin.Given that we obtained the same optimum product mix whether we target on contribution margin or target on operating income when optimizing. For completeness, we would highlight that this implies that optimum product mix is insensitive to fix costs....
