The profitability and efficiency of the Printed Circuit Board

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2.0Printed Circuit Boards (PCB) Department

2.1Required Sales

2.2Significance of Tax

2.3Assumptions of CVP Analysis

3.0Plasma Department

4.0Microcontroller Department

5.0Conclusion / Recommendation

6.0 References

7.0 Appendix

1.0 Introduction

In this report the profitability and efficiency of the Printed Circuit Board (PCB), Plasma and Microcontroller Departments of LifeSung Corporation will be examined. Within the PCB Department the required sales in units needed to meet the sales target will be determined for the Advanced, Boosted and Custom Circuit Boards. In regards to the Plasma Department it shall be determined whether it will be more profitable for the company if the Plasma B line is closed down. And finally within the Microcontroller Department it will be determined whether to make the new product Controller 457 or to accept the offer from APG Technology and buy them. These evaluations will be achieved through the examination of cost volume profit analysis and relevant costs and benefits in the Departments.

2.0 Printed Circuit Boards (PCB) Department

2.1 Required Sales

Cost Volume Profit Analysis is used in order to determine the level of sales needed to reach the target profit level. The formula used to calculate this figure is:

(Ke 2014, A).

Therefore in order for James Cook to meet the sales target of $2,800,000 (after tax) there would need to be:

  • Advanced : 46711 units,
  • Boosted: 23355 units, and
  • Custom: 7786 units sold.[i]

2.2 Significance of Tax

When a company is liable for income taxes, then this may be taken into account when determining the target sales volume. When a target profit is stated as an after-tax amount, then the break-even formula must be modified to account for the amount of taxation payable (Ke 2014, C). This means that a company will have to potentially make more sales if they want to maintain profit margins. In regards to this particular case if the target profit given by James Cook was a before tax figure this would mean that the actual profit of the department would only be $1960000 after considering tax, meaning that there would be less sales required in comparison to the above figures to meet this particular target. Therefore, tax is very significant in determining the required number of units to be sold to earn a certain level of profit.

2.3 Assumptions of CVP Analysis

CVP analysis is a simplified model and therefore contains many assumptions. These include:

  1. The behaviour of total revenue is linear; therefore the selling price remains constant over the relevant range. And changes in revenue arise only because of changes in the number of units sold.
  2. The behaviour of total costs is linear over a relevant range in relation to output level. This implies three more specific assumptions;
  1. Costs can be categorised as fixed, variable or semi variable. Therefore total fixed costs remain constant and variable costs per unit remain constant over the relevant range
  2. Labour productivity, production technology and market conditions do not change
  3. There are no capacity additions during the period under consideration.
  1. The Sales mix remains constant over the relevant range
  2. The levels of inventory at the beginning and the end of the period are the same
  3. For both variable and fixed costs, sales volume is the only cost driver. (Langfield-Smith 2012)

In regards to this specific case the assumptions made are that the selling prices for the three products will remain constant for the foreseeable future and the level of activity is the determining factor of revenue. Also in this case it is assumed that total fixed cost remain constant at $780,000 and variable costs remain constant per unit. It is also assumed that all labour productivity, market conditions, production capacity and technology do not change. In this case the sales mix is also assumed to remain constant at 60%, 30% and 10%. In this case it can be inferred that the level of inventory is the same at the beginning and the end of the period as no other information has been given.

3.0 Plasma Department

When deciding whether or not to shut down a product line one must determine the relevant information; that is the costs and benefits that will change if the decision is taken (Ke 2014, B). This is helpful in determining the impact of shutting down a product line. In this particular case one must determine whether or not to shut down Plasma B. When determining whether or not this product line is profitable or not, only relevant costs should be included such as cost of sales, wages and fixed overheads. And not including corporate and divisional overheads that would be incurred regardless of Plasma B being shut down.

Therefore, Plasma B should not be shut down as the product line is actually making a profit of $316,000[ii]. This profit is then used to pay the overhead costs that would be incurred regardless of whether or not Plasma B was closed down or not. Even though closing Plasma B would have no impact on the sales of Plasma A there will be an impact on the level of allocated costs for other departments in the Electronics Division. Meaning that; if Plasma B was to close then the Plasma department would lose $316000 and therefore overall profit of the Electronics Division would decrease as corporate overheads and divisional overheads would need to be re-allocated, increasing the costs of other departments.

4.0 Microcontroller Department

When deciding whether to make or buy a product one must consider not only avoidable and unavoidable costs but also the opportunity cost of making the decision (Ke 2014, B). When only considering quantitative factors, the Microcontroller Department should accept the offer from APG Technology as it $20,000[iii] cheaper than buying the new machine and making it yourself.

But one must also consider the strategic implications of this decision such as; whether the quality control can be maintained if the controller 457 are purchased from the outside supplier? Although as a term of the contract you could state that all of the controller 457 must be a minimum of a certain quality grade that is consistent with the rest of your products, there is no 100 percent guarantee that, that is the quality of product you will receive. Also the department should also consider whether or not they have some other profitable use for the space that would be taken up by the new machine. The space that would be used could be rented out or used to make another product but at this moment in time you currently have no other use for the space. As well as whether the APG Technology will be dependable in meeting the shipping schedule. For instance say you want the products delivered on the first Tuesday of every month, is there a guarantee that APG will be able to meet this schedule? Also whether APG Technology would be willing to increase capacity if your demand level changes. The controller 457 is going to become the main product of the microcontroller department meaning that a greater number of controllers will need to be supplied in order to meet the future demand. The question you must ask yourself is; will APG be willing and able to increase the number of Controller 457’s supplied to LifeSung?

Also you must consider what you existing customers and employees will think of this new product. In regards to employees although they would have needed to have been trained to use the new machine they could be facing job losses if you decide to buy the Controller 457. This is due to the fact that this controller will become the main product of this department and therefore less of the existing products will need to be produced resulting in less labour required and job losses. Therefore you must consider the impact of this decision on employee morale. In regards to customers you must consider what the impact this decision will have on consumer confidence. You must consider whether or not one of your major selling points is that everything is made by LifeSung in the Microcontroller Department or whether it is the quality of your products that is the selling point. Either way buying the product instead of making the product carries some risk that the product may not turn out the way in which you wanted and how the product is received by customers.

5.0 Conclusion / Recommendation

Therefore in regards to the Printed Circuit Boards Department the required level of units sold to reach the target profit of $2.8million is 46711 units of Advanced, 23355 units of Boosted, and 7786 units of Custom circuits. Now in regards to the Plasma Department it needs to be decided whether or not the Plasma B line needs to be shut down. Even though reports stated that Plasma B was underperforming this was not the case, it was actually making a profit if you exclude all the irrelevant information and focus only on the costs that are unique to Plasma B. Therefore Plasma B should not be shut down as this would result in and even larger loss to the whole division. In respect to the Microcontroller Department I believe that the new machine should be bought and Controller 457 should be made by the department. Even though is $2 more expensive per unit to make the controller, when considering the strategic implications of buying the product from APG Technology it would be wiser to make it yourself. It was stated that this product was going to be the ‘mainstay of the Microcontroller Department in years to come,’ meaning that the production of this product in the future would need to be increased and it is not guaranteed that APG will increase its supply to more than 10,000 units per quarter.

Therefore using cost volume profit analysis and relevant information the level of units needing to be sold in the PCB Department was determined, it can be seen that the Plasma Department should not be shut down and that the Microcontroller Department should buy the new machine and produce controller 457 itself.

6.0 References

A: Ke, Kenneth. 2014. “Lecture 7: Cost Volume Profit Analysis.” Blackboard Learning .

B: —. 2014. “Lecture 8: Infromation for Decisions: Relevant Costs and Benefits.” Balckboard Learn.

C: —. 2014. “Topic 7 Homework Solutions.” Blackboard Learn.

Langfield-Smith, Kim, Helen Thorne, and Ronald Hilton. 2012. Management Accounting: Information for Creating and Managing Value. 6ed. Australia: McGraw Hill Education.

7.0 Appendix










- VC








WACM = (37 x 0.6) + (90 x 0.3) + (122 x 0.1)

= 22.2 + 27 + 12.2

= $61.40

FC for the year = 65000 x 12 = 780000

Target Profit Before Tax =

= 4,000,000

Total Units sold to earn TP =

= 77850.16 ~ 77851 units


Total x Sales mix

Units to be Sold


77851 x 0.6



77851 x 0. 3



77851 x 0.1


*All unit totals rounded up

[ii] Plasma B



Less: Cost of Sales


Gross Profit


Less: Operating Expenses



Fixed Overheads