Project 3: Costing and Cost Allocations
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Scenario
In your last business report, you recommended a strategic decision about the revenue target to make LGI competitive. In Project 3, you will help LGI’s leadership move the company forward on a path toward a sustainable future. The company needs to restore the confidence of shareholders and other stakeholders by maintaining a satisfactory level of operating performance.
LGI, like all companies, needs robust earnings before interest, taxes, depreciation, and amortization (EBITDA). In other words, earnings must be sufficient to cover LGI’s investing activities, debt service, and taxes—with a healthy profit left for reinvestment and distributions to stockholders
Your Project 3 business report will focus on strengthening EBITDA. To do this, you will analyze LGI’s cost structure and determine how to increase productivity. These tasks are prerequisites for identifying a future investment (Project 4) and how to finance it (Project 5).
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Step 1: Prepare for the Project
For the next two weeks, you will focus on the specific actions LGI can take to strengthen its EBITDA. You will analyze cost-volume-profit, pricing decisions, and activity-based costing. Log into O’Reilly by following these instructions before accessing the chapters and completing the required reading.
Required Reading
Davis, C. E. & Davis, E. (2011). Managerial Accounting. Wiley.
Chapter 3: Cost-Volume-Profit Analysis and Pricing Decisions
• Section 3.1 to 3.3
Chapter 7: Activity-Based Costing and Activity-Based Management
• Sections 7.1–7.2
Recommended Reading
Chapter 2: Cost Behavior and Cost Estimation
• Sections 2.1–2.3
Step 2: Review and Practice
Using the Project 3 Review and Practice Guide, review EBITDA and cost structures to set LGI on the path toward a sustainable future. Then apply what you have learned by completing the exercises and problems referenced in the Project 3 Review and Practice Guide.
You must review the guide and do the practice exercises and problems so that you
• are prepared to have informed discussions with your team about LGI’s income statement,
• understand what the cost data reveal about operational efficiency, and
• can use this information to make recommendations for improvements.
Complete this review and practice by the end of Week 5.
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Step 3: Participate in the Required Project 3 Discussion
You have finished reviewing the material and performing the exercises, but you have some questions. Participate in the Project 3 class discussion. Respond to the two questions below by posting in the discussion; then, respond to two of your classmates’ discussion posts by the end of the week. Step 4: Complete the Analysis Calculation for Project 3
Your team has provided you with an Excel workbook containing LGI’s financials. You will use the workbook to
• Determine how LGI can strengthen EBITDA
• Discover ways for LGI to increase productivity
• Perform cost calculations in the worksheets
Complete the analysis calculation for the project:
• Download the Project 3 Excel Workbook, click the Instructions tab, and read the instructions.
• Calculate and evaluate costs using the worksheets.
• If you would like instructor feedback on this step, follow the instructions in the box below to submit your Excel file to the Assignments folder as a milestone by the end of Week 5. This is optional. If you choose to submit the milestone, you will receive instructor feedback you may use to make corrections before submitting your final Project 3. To distinguish the milestone submission from the file you will submit in Step 5, label your file as follows: P3_milestone_lastname_Calculation_date
