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d.There appears to be both good news and bad news. On the one hand, revenue has increased dramatically, by 20%. On the other hand, the mix of sales has worsened. The net effect of these two factors is positive. Tom must seriously consider whether his business strategy is to sell more of high margin products (the deluxe bikes) or more of thelower margin product (the standard bike). The budget indicates the former but actual results indicate the latter. Because actual results likely reflect customer tastes, Tom may be well advised to revise his plans.MINI-CASES8.69a.The following table shows Jason’s expected profit using the information contained in the master budget:Master Budget(Amazing Grace Putter)Putters sales5,000Revenue5,000 $280$1,400,000Variable costsMaterial costs: Aluminum & weights (for putter head)5,000 $60$300,000Shaft (steel)5,000 $840,000Grip5,000 $1050,000Labor costs5,000 $60300,000Balakrishnan, Sivaramakrishnan, & Sprinkle – 2eFOR INSTRUCTOR USE ONLY8-49
Contribution margin$710,000Fixed costsGiven250,000Profit$460,000Alternatively, we could calculate Jason’s master budget profit using the cost-volume-profit (CVP) equation.We have:Profit before taxes = unit contribution margin × sales in units – fixed costs.The budgeted contribution margin on each Amazing Grace putter = $280 – $60 – $8 – $10 – $60 = $142. Additionally, Jason’s fixed costs are expected to be $250,000. Finally, Jason’s master budget calls for sales of 5,000 putters. Thus, we have: ($142 × 5,000) – $250,000 = $460,000 in master budget profit.b. Using the data provided, the following table presents Jason’s actual profit from his Amazing Grace putter: Actual Profit(Amazing Grace Putter)Putters sales5,600Revenue5,600 $245$1,372,000Variable costsMaterial costs: Aluminum & weights (for putter head)5,600 $42$235,200Shaft (steel)5,600 $844,800Grip 5,600 $1267,200Labor costs5,600 $50280,000Contribution margin$744,800Fixed costs300,000Profit$444,800Thus, Jason’s total profit variance = $444,800 – $460,000 = ($15,200) or $15,200 U. That is, Jason’s actual profit is $15,200 lower than his master budget profit.c.Using the assumptions contained in the master budget and adjusting for the actual sales level of 5,600 putters, we have:Flexible Budget Profit(Amazing Grace Putter)Balakrishnan, Sivaramakrishnan, & Sprinkle – 2eFOR INSTRUCTOR USE ONLY8-50
Putters sales5,600Revenue5,600 $280$1,568,000Variable costsMaterial costs: Aluminum & weights (for putter head)5,600 $60$336,000Shaft (steel)5,600 $844,800Grip 5,600 $1056,000Labor costs5,600 $60336,000Contribution margin$795,200Fixed costs250,000Profit$545,200Alternatively, we could use Jason’s CVP model to answer this question. Using the equation we developed in part [a] and plugging in an actual sales volume of 5,600 puttersyields:Flexible budget profit= ($142 × 5,600) – $250,000 = $545,200.d.To answer this question, we need to look at the sales volume variance and the sales price variance. After all, the decision to reduce the sales price affects the quantity of putters sold (sales volume) and the price at which the putters are sold (sales price). The net effectof these two variances gives us the profit impact associated with a change in the sales price.