Response to the following questions:
1. The President of DM Industries shook his head. "I just don't understand what happened last month. Sales were up but we are showing a lower income than we expected. I know the purchasing department got a good price on our raw materials and Human Resources tells me that they hired more qualified people than we really needed. I need someone to explain to me what happened. Here are some of the numbers I got from accounting".
|
|
Actual
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Budget
|
|
Sales (Units)
|
8,750
|
8,000
|
|
Sales
|
$1,147,500
|
$1,024,000
|
|
Direct Materials
|
$27,675
|
$24,000
|
|
Direct Labour
|
$872,813
|
$784,000
|
|
V MOH (based on Machine Hours)
|
$12,200
|
$10,800
|
|
Variable Selling and Admin
|
$17,500
|
$16,000
|
|
Fixed Selling and Admin
|
$158,000
|
$150,000
|
According to the budget, each unit produced should take 2 kilograms of direct materials and 3.5 hours of direct labour. Overhead gets applied at a rate of $2.70 per machine hour and we should be able to produce two units per machine hour. DM Industries was actually able to purchase Direct Material at $1.35 per kilogram and paid $28.50 per hour for labour. According to the machine logs, 4,450 Machine Hours were used.
Required:
Write a memo to the president of DM industries detailing the cause(s) of the results. Your memo should provide details of any variances and should comment on whether the decisions to purchase cheaper materials and more expensive labour were good ones.
2. Greencorn Stores (GS) is a retailer in Nova Scotia operating three locations; Windsor, Truro, and Pictou. The most recent monthly income statement for GS is given below:
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Windsor
|
Truro
|
Pictou
|
Total
|
|
Sales
|
$1,300,000
|
$800,000
|
$750,000
|
$2,850,000
|
|
Variable Expense
|
850,000
|
625,000
|
610,000
|
$2,085,000
|
|
Contribution Margin
|
450,000
|
175,000
|
140,000
|
765,000
|
|
Fixed Expenses
|
275,000
|
200,000
|
145,000
|
620,000
|
|
Operating Income (Loss)
|
$175,000
|
($25,000)
|
($5,000)
|
$145,000
|
Due to the losses reported, GS is considering closing either the Truro or Pictou locations.
If Truro were closed, 20% of the fixed expenses allocated to it would continue to be incurred. Also, the closing of Truro would result in a 5% decrease in sales in both Windsor and Pictou.
If Pictou were closed, 25% of the fixed expenses allocated to it would continue to be incurred. Closing Pictou would not have any impact on sales at the other two stores but would allow GS lay off one of its head-office personnel with an annual cost of $32,000.
Required:
Write a memo advising if GS should close either or both stores.Your memo must demonstrate the overall increase or decrease in the operating income of GS based on your recommendation.
3. Greencorn Plumbing Supply (GPS) manufactures sinks. Each year GPS makes 4,000 drain units for their sinks. The unit product cost of the drain is computed as follows:
|
Direct Materials
|
$ 40.00
|
|
Direct Labour
|
$ 9.50
|
|
Variable Manufacturing Overhead
|
$ 8.00
|
|
Fixed Manufacturing Overhead
|
$ 20.00
|
|
Unit Product Cost
|
$ 73.00
|
An outside supplier has offered to sell GPS 4,000 drain units for $ 65.00 a unit. If GPS decided to accept the offer, it would avoid $30,000 in fixed manufacturing overhead costs. Assume that Direct Materials and Direct Labour are variable.
Required:
Assume GPS has no alternative use for the space currently used to make the drain units. Write a memo advising if GPS should accept the offer.