How does change in basis of allocation impact profit ?
Solution www.bizkul.com Case I Amt Rs. Restaurant A B Total Revenues 1,000,000 400,000 1,400,000 Direct 600,000 220,000 820,000 Indirect 200,000 100,000 300,000 Margin 200,000 80,000 280,000 % margin 20 20 20
Alternate scenario www.bizkul.com Case II Amt Rs. Restaurant A B Total Revenues 1,000,000 400,000 1,400,000 Direct 600,000 220,000 820,000 Indirect 150,000 150,000 300,000 Margin 250,000 30,000 280,000 % margin 25 7.5 20
In continuation of the previous example, assume that Rs.6000 is not cost, ie assume some raw material which is anyway spare – eg. wood, is used for this purpose. So this cost actually may not be relevant, thou labour cost may be relevant then what happens to your decision?
Try to develop a different perspective and way of thinking
Considers entire life cycle of product from start to finish
Provides important information for pricing decisions
For example, if a mobile phone is built, if the R&D costs are high for the company, the repairs and maintenance cost to the customer may be low; so the life cycle is across the life of the product and considers costs and impact on prices