On january 2 2006 bobolina received an order from

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On January 2, 2006, Bobolina received an order from Raol Loreen for a large quantity of handbags. Raol Loreen’s clients are willing to pay a premium for high quality goods. Bobolina decided to ensure the quality of their handbags, so they re-trained all of their laborers and acquired new machinery. They also changed their suppliers to one that sells smaller batches of higher quality leather. Required : a. Compute the following variances: (16 marks) i. Material price and quantity variances ii. Labor rate and efficiency variances iii. Fixed overhead budget variance iv. Sales price variance and sales volume variance b. Management has been given limited time at the Board of Directors meeting to discuss Bobolina’s results for the year 2006. Use 3 variances to discuss the success or failure of management’s strategy in the year 2006. (Hint: Was it a good idea to change to a higher quality/higher priced product?) (9 marks)
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6 Question 6 (45 marks; suggested time 60 minutes) Relevant Cost Analysis Tierra Lago Lodge is situated in an alpine valley. The lodge currently operates for 26 weeks each year, May to October. The lodge has been open since the spring of 2004. Revenue for the lodge is generated through the rental of its thirty (30) suites on a weekly basis. The weekly rental fee is $1,000 per suite. The owner is disappointed with the net loss and about the fact that the occupancy rate averages 70% over the entire 26 weeks. Customers typically book several weeks in advance due to the need to arrange transportation to the remote lodge. During the months of June, July and August there are typically no vacancies. The maintenance manager's salary will increase next year by $3,000 and property tax is expected to increase to $72,000 per year. The accountant has provided the following data for the past year (2000): Sales ($1,000 X 546) $546,000 Housekeeping 83,520 Maintenance 56,380 Administration 154,600 Utilities 63,680 Property Tax 60,920 Depreciation 120,000 Advertising 55,000 Net Income (48,100) Additional Information: Housekeeping: Costs are $120 per week/per suite for cleaning (based on usage) plus a manager’s salary. The manager is contracted on a weekly basis. Maintenance: A $40,000 salary for the manager plus material costs which are traceable to usage (ie. quick "touch up" work done when the guest vacates the suite). Administration: Two annual salaries of $50,000 plus a bonus of 10% of sales. Utilities: The manager estimates that utility costs of $20,000 are fixed per year. The heating and electricity are turned on only when the suite is occupied. (60% heating, 40 % electrical) Depreciation: Straight-line, book value $960,000, current market value $800,000. The two administrative manager's are employed year-round. The maintenance manager is employed year-round to keep the facility in good repair. Required: a) It is May and the company has ten suites available for the first week of August and is negotiating with a client who wants to book all ten. What is the minimum price you would charge the client for all ten suites? (3 marks) b) Would your calculation of the minimum price change if it was now the last week of July (and the client wants to book ten suites for the first week of August)? (10 marks) c) What TWO qualitative issues should be considered when offering the “minimum price” in part b)? (4 marks)
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