D there appears to be both good news and bad news on

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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 the lower 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. M INI -C ASES 8.69 a. The following table shows Jason’s expected profit using the information contained in the master budget: Master Budget (Amazing Grace Putter) Putters sales 5,000 Revenue 5,000 $280 $1,400,000 Variable costs Material costs: Aluminum & weights (for putter head) 5,000 $60 $300,000 Shaft (steel) 5,000 $8 40,000 Grip 5,000 $10 50,000 Labor costs 5,000 $60 300,000 Balakrishnan, Sivaramakrishnan, & Sprinkle – 2e FOR INSTRUCTOR USE ONLY 8-49
Contribution margin $710,000 Fixed costs Given 250,000 Profit $460,000 Alternatively, 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 sales 5,600 Revenue 5,600 $245 $1,372,000 Variable costs Material costs: Aluminum & weights (for putter head) 5,600 $42 $235,200 Shaft (steel) 5,600 $8 44,800 Grip 5,600 $12 67,200 Labor costs 5,600 $50 280,000 Contribution margin $744,800 Fixed costs 300,000 Profit $444,800 Thus, 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 – 2e FOR INSTRUCTOR USE ONLY 8-50
Putters sales 5,600 Revenue 5,600 $280 $1,568,000 Variable costs Material costs: Aluminum & weights (for putter head) 5,600 $60 $336,000 Shaft (steel) 5,600 $8 44,800 Grip 5,600 $10 56,000 Labor costs 5,600 $60 336,000 Contribution margin $795,200 Fixed costs 250,000 Profit $545,200 Alternatively, 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 putters yields: 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 effect of these two variances gives us the profit impact associated with a change in the sales price.

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