“Mr. Beridon received your requests for information and returned data which you have compiled in an MicrosoftÂ® ExcelÂ® spreadsheet (see document template). He also said, “We grow sod and trees at Jeemp Farms. We sell the sod mainly to home builders in the area, although we sell to some individuals who are purchasing square footages to re-sod their yard. Many home builders will purchase to sod an entire subdivision. They then may come back to us to purchase trees for the yards. It really is a package deal. For builders like that, we are a one-stop-shop. In most cases, however, we sell the trees to orchards and some individuals. The purchaser is responsible for all shipping costs related to their product.”
“Our production process is different for each product. For sod, we plant the seed, irrigate, cut, and roll the sod and then transport it. For the trees, we plant the root stock, graft the tree, water until a particular maturity and then dig it up and sell it. We inspect the plants as needed to make sure we are producing a quality product that is disease-free.”
“We have delayed purchasing some machinery that reduces time for the planting of the trees because it is a large up-front cost and we don’t want to have a huge outlay of cash if our profits keep going down.”
“The grass does not require as much irrigation as the trees, as it is at a lower elevation than the tree acres and is closer to the creek; it gets a lot of the run off.”
“Historically, we have always been able to sell everything we produce. Hopefully, that will continue since Houston is expanding rapidly.”
HERE’S PART OF THE ESSAY, JUST NEED A INTRO AND CONCLUSION DONE PLEASE: SEE BELOW FOR PART OF THE ESSAY::::
The method in which overhead costs are applied to each product will affect the book profitability of trees and sod for Mr. Beridon. Traditional costing allocates overhead by looking at the number of labor hours associated with each product and applying an estimated overhead rate to each labor hour. This can produce overhead per product and per unit that is less accurate. ABC costing is a more detailed method of allocating overhead costs by breaking down each element of the overhead costs and determining what percent of that cost is associated with trees and what percent is associated with sod. In this case traditional costing makes trees look more profitable than ABC costing. The product margin per unit of trees under traditional costing is $8.51 while the profit margin per unit under ABC costing is ($0.28). Traditional costing for sod had the opposite effect. Traditional costing made sod look less profitable than under ABC costing. Under traditional costing sod had a profit margin per unit of $0.21. However, under ABC costing sod had a profit margin per unit of $0.26. The best argument for Mr. Beridon to cut the sod portion of his company is under the traditional costing method. Here, trees have a much greater profit margin per unit, $8.51, than sod, $0.21. However, both units are profitable. Furthermore, Mr. Beridon is able to produce many more units of sod than trees. This year, Mr. Beridon produced 1,556,851 units of sod compared to 8,909 units of trees. The total profit margin for sod is $331,292 compared to trees which is $75,785. Under traditional costing, it is difficult to argue that sod should be cut. This argument becomes weaker under ABC costing where sods profit margin per unit increase to $0.26 and total margin increases to $409,600. Mr. Beridon should cut the tree portion of his company under ABC costing. Under ABC costing, trees produce a negative profit margin per unit and in the aggregate. The profit margin of trees per unit under ABC costing is ($0.28) and the total profit margin is ($2,522). With this information, Mr. Beridon could decide to cut the tree portion of his business because it looses money. However, Mr. Beridon could determine that there are incidental benefits to keeping the tree portion of the business. Mr. Beridon references the fact that the trees and the sod come as “a package deal.” As a result, Mr. Beridon may receive more sod orders, which are profitable, by having a tree services that looses money.