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Gomez Electronics Inc Case Solution

Solution Id Length Case Author Case Publisher
735 1064 Words (4 Pages) E. Richard Brownlee Darden School of Business : UV1745
This solution includes: A Word File A Word File and An Excel File An Excel File

The difference in these two approaches arises due to calculation of the costs that are related to the production of the products. In the full costing system the company includes all the costs that are probable that might be incurred in the future for the production of the particular goods. This calculation of the cost depends on the past experiences and performances of the company. As there is estimation in the calculations of full costing system, so there are chances of its deviation from the actual costs. The full costing system counts the fixed costs that are related that are incurred which may not be related to actual product. So full costing may result in overstatement of the costs and hence result in lesser net income. Furthermore in full costing system the administrative charges are also included which may not be specifically related to the production of product. Whereas in the actual costing method the administrative cost are not included because that are not related directly to the production of a particular product. In this way full costing system overstate the costs but it is more effective for showing the actual profitability of the company as a whole.

Following questions are answered in this case study solution:

  1. Why Net Income is different under full costing system and direct costing system?

  2. Performance of Company over the last six months

  3. Advise for the President Regarding the Discounting Company proposal.

  4. Recommendation of Costing System.


Gomez Electronics Inc Case Analysis

1. Why Net Income is different under full costing system and direct costing system?

The approach which will be more effective in evaluating the proposal of the discount company will be the actual costing approach. This approach would result in the greater net income for the producing company hence the company will be more inclined to accept the contract of producing the CD players. Furthermore this approach includes only the costs that are specifically related to the production of the CD players, not the other cost that the company incur due to its existence. As the company has to incur the fixed costs even if it does not accept the contact and produce nothing, so the discount company cannot consider these cost in evaluating its contract.

2. Performance of Company over the last six months

The performance of the company over a period of time depends upon the profit that company is earning or the extent to which the company is able to make the revenue by using the resources. Thus in this case by comparing the comparative income statement we can analyze the performance of the company. By analyzing the statements we can interpret that the company is not much consistent in maintaining it actual sales with the budgeted sales. As the company estimated the sale of greater number of products but could not succeed in achieving those sales. Furthermore the actual costs of the company has deviated significantly from the budgeted costs, the company estimated smaller costs but in actual the company incurred much greater cost, which resulted in the lesser actual net income than the budgeted income. Furthermore the company is successful in maintaining the quality of its product as the company president is ready to compromise net profits but not the quality. This would help the company in attaining greater profits for the long run.

3. Advise for the President Regarding the Discounting Company proposal.

As the company is producing the model C, which is similar to the product which the discount company is demanding, for the cost of $24.4 per. The unit cost of the CD players demanded by the discount company is $2 less than the actual cost of Model C of Gomez Inc. Furthermore the discounting company is ready to give $28.75 for each of the CD players that the Gomez Inc. will be producing for it. Thus by comparing the cost and price of the CD players, the contact proposed by the discounting company appears appealing as it would enable the Gomez Company to earn $4.35 on each CD player and $21750 for 5000 Cd Players. Thus the president of the Gomez Inc. would be advised to accept the proposal of the discounting company.

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