3.2 Large rotating equipment (for example, air blowers or gas compressors used i
ID: 2337052 • Letter: 3
Question
3.2 Large rotating equipment (for example, air blowers or gas compressors used in oil refining operations) requires lubrication. Given the enormous capital cost of such equipment, the lubrication system must be highly instrumented, i.e., it must have equipment shutdown links in the event of low lube oil pressure, pump failure, etc. Typically, a separate skid containing the lube oil pump and holding tank is ordered separate from the compressor or air blower You work for a small company with a staff of 20 that manufactures these products as well as oil field gas compressor skids. The company does not code its labor to specific projects, since labor moves around the shop floor from jo be too inaccurate to be of value. However, component parts are tracked and coded to each product skid. Over the last five years, margin based on COGS of component parts has run at only 32%, ie COGS (component parts) has run at 68% Also, tracking the number of hours on each skid proved to A pipeline company that is building a major expansion has requested a budgetary quote (in essence, an indication price that will be used by the pipeline company to prepare its investment analysis, which may influence whether the company is asked to prepare a formal bid in the future) The requested quote is for one lube oil skid that is twice the capacity of any unit built before in the shop. The pipeline company indicates that they may require 20 such units (two at each of 10 compressor stations along the new pipeline). An engineer in the company has priced components at $356,000 What do you give as a budgetary quote? What reservations would you have about the accuracy of the quote? Is it at more risk of being too high or too low? Why? Can you think of questions you would ask the enginee?Explanation / Answer
Answer to Question no. 3.2
As an engineer priced components $ 356,000 and we have COGS run at 68%, so we would like to quote the components at $ 242,080 ($ 356,000 * 68%).
As we have such labour which is not a project specific and it will not cost extra while making this components and also we have no shortage of time and capacity. If we quote on this price there may be best chances of getting the formal bid in future. It is not too low quote as it is beneficial of company that because of this quote we can get future bid and can make more profit. We would like to aske to engineer that what factor he considered while pricing the components.
Answer to Question no. 3.3
When Polymerco’s production is running at 84% of capacity
In this case company should go for offshore sales as it is not using their full capacity to sale the product in the domestic market. If it goes for offshore sales, definitely there would be some incremental profit which will increase in wealth of the company as well as market share of the company by improving its goodwill by the help of MNC status. For offshore sales there would no need to incur any extra fixed cost upto utilization of 100% capacity.
When Polymerco’s production is running at 100% of capacity
In this case whether to go for offshore sale or not is depend upon what contribution margin is comes from offshore sales because at 100% capacity utilization for domestic sales there are requirement to increase the capacity or get more than or equal to contribution margin from offshore sales. So at 100% capacity utilization whether to go for offshore sale or not is depend upon the terms and condition for offshore sales.
Answer to question no.3.5 a
Answer to question no. 3.5 b)
As per sales pattern of business it is very good as sales is increasing at good rate in year 5 it is almost increased to 50% from year 1. so it is very good growth in sales. However contribution margin is declined to 11.39% in year 5 compared to 17.50% in year 1 that is not the good sign for the business. there are many reason for this decline of margin like COGS is more increased than sales, other income and interest on long term advances is also decreased which results in less net profit.
Warehouse staff salaries COGS Annual christmas party SG & A Temporary staff salaries SG & A Purchase cost of chemical and supplies COGS Shipping cost from supplier to warehouse COGS Shipping cost from warehouse to supplier SG & A Phone costs SG & A Travel for sales staff SG & A Head office staff salaries SG & A Cost of benefits for permanent staff SG & A Cost of storage racks Assets Utility bills COGS New computer hardware and software to support integrated order, inventory, sale, and invoice system Assets Membership in chamber of commerce SG & A Warehouse and office rental charges SG & A Snow removal and ground upkeep costs COGSRelated Questions
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