Luxor Cosmetics Executive Summary
2008 Variable manufacturing cost as a percentage of selling price
Product (Variable manufacturing cost/WSP Production) Mark up
Lipstick 16.8/21 80% (21/16.8)-1 25%
Nail polish 10.5/15 70% (15/10.5)-1 43%
Creams 2.8/5.6 50% (5.6/2.8)-1 100% 2010
Lipstick 15.3/18 85% (18/15.3)-1 18%
Nail polish 9.3/11.6 80% (11.6/9.3)-1 25%
Creams 3.3/6.6 50% (6.6/3.3)+1 100%
*Note that these calculations are done for goods produced in the year in question Question 2
(cost of goods manufactured in 2008/ sales value for units produced in 2008) * ending inventory 2008
(16.8/21) * 11.5
Luxor uses a FIFO inventory system, so the inventory that is sold first …show more content…
Through the implementation of the suggested changes in allocation, more of the fixed costs will be allocated to the cream products because this product line has the highest margin (as shown in the budgeted Cost of Goods Manufactured above), even though creams have the lowest total sales value. This will lead to more of the fixed costs being incorporated into the Cost of Goods sold, and not into the ending inventory numbers, therefore decreasing pre-tax income even further.
Allocating the fixed costs in this manner would not affect the Cash Flow Statement in any way, as the fixed costs would still lead to a cash disbursement of an equal value regardless of which product line they are allocated to.
Question 8 Luxor Cosmetics is a company that is stuck in a dying market because most of their customers that buy the lipstick and nail polish are women aged 45 to 75 who are in the lower income group. As that group gets older and