ADMS 3510 F 10 MT#2 MT#2 Solutions

ADMS 3510 F 10 MT#2 MT#2 Solutions - AK/ADMS 3510 3.0: Fall...

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AK/ADMS 3510 3.0: Fall 2010: SOLUTIONS: Mid-term test #2: Sunday 14 th November, 10 am: Time allowed 2 hours: There are four equally weighted questions. Question 1:Canada Cordless Appliances: (25 marks): Canada Cordless Appliances (CCA) is a manufacturer of small household appliances that rely on new rechargeable battery technology to operate cordlessly. The company was originally established 25 years ago to manufacture appliances with plug-in cords, but they have now decided that market is too mature to be profitable and they specialize in cordless technology exclusively. One of their latest products is a cordless steam iron. CCA has decided that they should sell their new cordless steam iron at a price of $27/$28. Both an externally purchased market research report and the CCA marketing manager agree that the most likely level of annual sales at a price of $27/$28 is 350,000. The static budget is based on selling 350,000 units in the year. This was believed to be 10% of the estimated total market for cordless steam irons. Exhibit 1: CCA: Cordless Steam Iron: Static Budget: 2011: Units 350,000 Revenue: $9,800,000 Variable costs: 2,800,000 Contribution margin: 7,000,000 Fixed costs: 2,712,500 Operating income: $4,287,500 The new product was introduced on 1 st January 2011. Results for the first quarter of 2011 are shown in exhibit 2. The actual total market size was 825,000 units in quarter 1 of 2011. Exhibit 2: CCA: Cordless Steam Iron: Quarter 1: Year 2011: Actual Results Quarter 1 Units sold 80,000 Revenue $2,100,000 Variable cost 656,000 Contribution margin 1,444,000 Fixed cost 683,000 Operating income $ 761,000
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to the effect that the static budget was “incorrect:” with a selling price of $27. Students were asked to make an appropriate assumption. Two reasonable assumptions exist: a) that the budgeted price was $27 and the static budget required revision, b) that the static budget selling porice was $28: either is acceptable. It is also possible to choose other assumptions to deal with the issue: please treat these on their merits. Assumption: no seasonality, so annual static budget can be divided by 4 to get quarterly budget. Static Budget: 1 st Quarter 2008: SP = $27 SP = $28 Units 87,500 87,500 Revenue: $2,362,500 $2,450,000 Variable costs: 700,000 700,000 Contribution margin: 1,662,500 $1,750,000 Fixed costs: 678,125 678,125 Operating income: $ 984,375 $1,071,875 @ sp = $27 Actual: Flexible Budget Static Budget Units 80,000 80,000 87,500 Revenue: $2,100,000 $2,160,000 $2,3,62,500 Variable costs: 656,000 640,000 700,000 Contribution margin: 1,444,000 1,520,000 1,662,500 Fixed costs: 683,000 678,125 678,125 Operating income: $ 761,000 $ 841,875 $ 984,375 Flexible budget Sales volume Variance variance $ 80,875 U $142,500 U Total variance $223,375 U Sales price variance: $60,000 U Variable cost variance: $16,000 U Fixed cost variance: $ 4,875 U Total: $80,875 U
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ADMS 3510 F 10 MT#2 MT#2 Solutions - AK/ADMS 3510 3.0: Fall...

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