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Cost Justification Essay

589 words - 3 pages

Cost Justification "Money" is one of the most critical issues in developing a business, without "money" the business will never work. There is few terms means money when it comes to business industry; terms as capital budgeting, cost allocation, job costing, is familiar to business entrepreneur. Capital budgeting is the making of long-run planning decisions for investments in projects and programs. It is a decision-making and control to that focuses primarily on projects or programs that span multiple years. This planning decision should be guided by the objectives of an organization and its strategies. Strategy describes how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its overall objectives.In Echofresh project for Engineering Context, the group decided to produce a new ...view middle of the document...

Expenditure mainly focussed on injection moulding and blow moulding machine. If the company forecast the demand to be 10 million units in the first year and increasing by 20% per year, and the factory running 24 hour and 7 days a week, this means one machine has to produce 1100-1500 bottle per hour to satisfy the order quantity. Another option would be running two machines together to meet the demand.Advantages of PET Plastic to other material in terms of cost: Low running cost Inexpensive raw material Cheaper in material handling and transportation Disadvantage of PET Plastic to other material in terms of cost: Very high initial investment Moderately high maintenance cost To determine the recommend retail price, the accountant must analyse and calculate all cost related to manufacture the drink. This will involve fixed cost and variable costs, fixed cost would be the first investment to get the business started, while variable cost is including cost of marketing, distribution, customer service, etc. The detailed breakdown of cost will be supplied within next few weeks, meanwhile the estimated budget of the drink, as agreed by team members is stated as follows.The contents of the bottle is 400ml and the recommended retail price advised is $1.99-$2.99 and the budget estimated cost to manufacture one complete bottle + drink are projected from 50 cents to 1 dollar.Operating income of the company will be determine by simple basic formula: Operating income = Revenues - Variable costs - Fixed cost Breakeven point is a quantity of output where total revenues and total cost are equal, it's also a useful tool to calculate the number of product required to cover the capital expenditure. The formula is derived from previous equation, by substituting operating income = 0, we obtain Breakeven no. of units = Fixed costs/ Unit contribution margin Where unit contribution margin is the difference between selling price and variable cost per unit.

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