Question 1 - Rigot Ltd. manufactures landscaping equipment known for durability. The unionized workforce renews its contract every five years, with the most recent agreement signed last year which provided for a 2% salary increase per year. The following is the budget for 2012 based on the production of 20,000 units.
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Budget
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Direct Materials
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$ 3,080,000
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Direct Labor
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2,500,000
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Variable Overhead
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700,000
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Fixed Overhead
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900,000
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Total
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$ 7,180,000
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Average Cost per unit
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$ 359
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Information available for standards utilized for 2012:
Direct materials - $11 per KG
Direct labor - $25 per hour
The Year 2012 in Review: During 2012 the actual production was 20,000 units. At the start of 2012 the senior management decided to buy materials from a new supplier for $15 per KG. Management was excited when they found out that the actual labor hours per unit was three less than the standard. In addition, since overhead is driven primarily by labor the variable overhead decreased by $180,000 and the fixed overhead was reduced by $60,000.
Actual material used per unit was 18 KG and the actual average labor rate was $30 per hour. The company implemented a just-in-time inventory system in 2011.
REQUIRED:
a) Calculate the material price variance.
b) Calculate the material quantity variance.
c) Calculate the labor rate variance.
d) Calculate the labor efficiency variance.
e) Analyze the 2012 results- specifically, the variances. Do you support the decision to change suppliers? Explain with supporting calculations.
Question 2 - Cosmo Corp. manufactures two electronic parts: K100 and K200. The company operates in a very competitive industry and their products compete directly with several other products. The CEO has played an active role in pricing the products and in decisions to add or drop product lines. The CEO is quite concerned with the decreasing sales of the K100 and is convinced that action must be taken to remedy the problem.
Sales of K100 dropped significantly in 2012 while the sales of the K200 have increased. At the end of 2011, the marketing department persuaded the CEO to pursue an advertising campaign to raise the sales of the K100. The subsequent 1,000 unit annual drop in sales of K100 (compared to 2011) has left the CEO furious. The production manager has assured the CEO that the quality of the product has remained constant.
The CEO is considering:
1) Firing the sales staff and sales/administrative manager of K100
2) Dropping the K100
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2012
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2011
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Total Units (produced/sold)
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22,000
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15,000
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Manufacturing Overhead Costs
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$3,860,000
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$3,300,000
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Product Information for 2012:
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K200
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K100
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Sales Price/Unit
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$210
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$260
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Unit Sales
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10,000 units
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12,000 units
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Direct materials per unit
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$80.00
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$29.17
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Direct labor per unit
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$20.00
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$25.00
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Other information:
The variable overhead cost per unit for the K100 and K200 is the same. Each product has a sales/administrative manager who is paid $72,000. The K100 leases factory equipment at $50,000 per annum while the K200 uses fully amortized/depreciated equipment that has a market value of $93,000. The company is not operating at full capacity.
REQUIRED:
a. Prepare a segmented income statement for 2012 to "evaluate" the products.
b. Should Cosmo drop the K100 product?
c. Respond to the CEO's intention to fire personnel. Should they be fired? Provide reasons for why they should or should not be fired? Based on the segmented income statement, what recommendations do you have for the company re: the two products?
d. The K300, a new product, is being considered with expected sales of 5,000 units at $135 each for the first year. K300's sales growth per annum for the next three years is projected at 3%. Direct material, direct labor and VOH total $120 per unit. The K300 would require a specially trained manager at a cost of $80,000 per year. Should the company add the K300? Provide calculations with explanations for your analysis/conclusion where appropriate.
Question 3 - The YAK Ventures specializes in producing and distributing organic fudge throughout Canada. The company operates three autonomous and decentralized divisions: Western, Central and Eastern. The company's cost of capital is only 3% and each division is expected to earn a return of at least this amount.
Sales data for the year ended 2012 for the divisions:
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Central
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Western
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Eastern
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Sales Volume
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405,000
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325,000
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395,000
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Sales Price
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$8.08
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$7.80
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$8.20
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Average Invested assets for each division:
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Central
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Western
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Eastern
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Invested Assets
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$4,256,000
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$4,125,000
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$3,912,000
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Total Fixed costs for the Company:
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Amortization & Lease
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$633,000
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Advertising
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$546,000
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Salaries
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$1,283,000
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Legal and Audit
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$120,000
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Other General and Administrative
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$135,000
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Total
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$2,717,000
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- The variable cost to produce the fudge for Western and Eastern was $3 per bottle. Central's variable cost to produce the fudge was 1/3 higher than the other divisions'.
- All divisions incur $1.50 per unit to package the bottles after they are produced.
- The divisions hire sales representatives to sell the product within their territory. The commissions are 10% of sales except for Eastern whose representatives get 15%.
- Amortization expense was $155,000 $135,000 and $128,000 for Central, Western and Eastern, respectively. This amortization calculation was based on units of production.
- Head office leases equipment for the divisions. The Central and Western division each had lease expense equal to 1/2 of the $70,000 lease expense for the Eastern Division. The remaining amortization expense was for a computer system used by all divisions that is located at the Head office (Vancouver).
- Advertising costs for divisional radio and newspaper ad campaigns directed by the divisions were: Central - $ 101,250, Western - $ 81,250 and Eastern - $ 98,750.
- There was also a national T.V. campaign to promote YAK for which the advertising agency directly billed YAK. $240,000 was billed by a national advertising agency which worked equally and separately on all three divisions.
- Central, Western and Eastern had $155,000, $195,000 and $225,000 in divisional office salaries, respectively. In addition, each division also has a controller hired by Head Office at $105,000 per year. The CEO was paid $200,000 and managed the sales forces for Central and Western Divisions. Eastern had its own sales manager hired at $150,000 per year by the Head Office. Remaining salaried employees worked at the Head Office.
- The auditors are appointed by the company's board of directors. It is not possible to specifically differentiate what audit expenses were incurred for each of the divisions, except for $45,000 that was billed for the total of 60 hours which were equally spent auditing at each division.
- The company's invested asset base at the end of the year was $12,651,048, a 6% increase over the previous year.
Required:
a) The Manager of Central has been bragging that he has the highest sales level and therefore he expects to achieve the highest bonus this year. Prepare segmented information to show the performance of the divisions and the performance of the managers.
b) Based on your analysis above, calculate the performance of the divisions using return on investment (ROI). Which division outperformed the other divisions this year?
c) Calculate the Residual Income for Western.
d) Holly, the manager of the Western has been contacted by a soy sauce manufacture to sell organic soy sauce under a Yak-Soy brand name. The sales manager for Western has calculated that this will increase income by $150,000 for the division. An analysis of the soy fermenting process indicates that they will need to spend $75,000 on the necessary equipment.
Would Holly be likely to accept this offer from the Soy manufacturer?
Identify and thoughtfully explain two other issues that the manager should consider before making this decision.