ADM 3346 Lecture Notes - Lecture 16: Earnings Before Interest And Taxes, Contribution Margin, Fixed Cost

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greychinchilla722

3 Dec 2017

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Weepy tile company makes two grades of tiles. Sales volume for the monthly budget is determined by estimating the total market volume for tiles and then applying the company"s prior year market share, adjusted for planned changes due to company programs for the coming year. The following are the company budget and the results of operations for march. All numbers are in thousands these are not per unit. Weepy tile expected to capture 10% of the market at the time the budget was prepared. Actual industry volume for march was 25,000 tiles. Prepare an analysis of the budget to actual using variances. Use the contribution margin approach for all the sales volume variances. Discuss briefly: sale price variances (price variance) is in level 3 of the variance analysis tree path: The price variances (price variance) = ,000u: sales volume variances ( sales-mix variance and sales-quantity ariance) is in level 2 of the profitability analysis tree path:

Related Questions

Aston International Products Ltd manufactures four products A,B, C and D. The budget for the upcoming financial year is asfollows:

Details	A	B	C	D	Total
	$â000	$â000	$â000	$â000	$â000
Direct materials	20,000	10,000	12,000	24,000	66,000
Direct labour	6.000	4,000	7,000	8,000	25,000
Variable overheads	2,000	1,000	3,000	6,000	12,000
	28,000	15,000	22,000	38,000	103,000
Sales	50,000	19,000	18,000	52,000	139,000
Contribution	22,000	4,000	(4,000)	14,000	36,000
Fixed costs	(8,000)	(6,000)	(2,000)	(7,000)	(23,000)
Profit/(loss)	14,000	(2,000)	(6,000)	7,000	13,000

Required:

Give the company three (3) reasons why orders for Product Cshould be rejected with immediate effect. (3 marks)

Explain to the company why orders for Product B should berejected even though it makes a positive contribution. (3marks)

What could management do to ensure that the production and saleof Product B is profitable? (3 marks)

Do a summary budget for the company to show how profits would beimpacted if Product C alone was shut down from the mix. (8marks)

Advise management on two (2) strategies that could be adopted toearn income if Product C was shut down from the mix. (4 marks)

What are differential costs. (2 marks)

Identify the relevant costs in the budget. (2 marks)

coraldinosaur635

Problem 17-38 Analyze Performance for a Restaurant (LO 17-5)

Dougâs Diner is planning to expand operations and is concernedthat its reporting system might need improvement. The master budgetincome statement for the Downtown Dougâs, which contains adelicatessen and restaurant operation, follows (in thousands):

	Delicatessen			Restaurant			Total
Sales revenue		$	600		$	2,000	$	2,600
Costs
Purchases			360			1,100		1,460
Hourly wages			30			438		468
Franchise fee			18			39		57
Advertising			50			100		150
Utilities			42			63		105
Depreciation			25			38		63
Lease cost			15			25		40
Salaries			15			25		40
Total costs		$	555		$	1,828	$	2,383
Operating profit		$	45		$	172	$	217

The company uses the following performance report for managementevaluation:

	DOWNTOWN DOUGâS
	NetIncome for the Year
	($000)
	Actual Results
Actual Results	Delicatessen			Restaurant			Total		Budget		Over-or (Under-) Budget^a
Sales revenue		$	700	$	1,000		$	1,700	$	2,600		$	(900	)
Costs
Purchases^b			450		400			850		1,460		$	(610	)
Hourly wages^b			35		350			385		468			(83	)
Franchise fee^b			21		30			51		57			(6	)
Advertising			50		100			150		150
Utilities^b			45		50			95		105			(10	)
Depreciation			25		38			63		63
Lease cost			15		25			40		40
Salaries			15		25			40		40
Total costs		$	656	$	1,018		$	1,674	$	2,383		$	(709	)
Operating profit		$	44	$	(18	)	$	26	$	217		$	(191	)

^a There is no sales price variance.

^b Variable costs; all other costs are fixed.

Required:

	Actual	Purchases Variances	Marketing & Administrative Variances	Flexible Budget	Activity Variance	Master Budget
Sales revenue	$700					$600
Variable costs:
Purchases	450					360
Hourly wages	35					30
Franchise fee	21					18
Utilities	45					42
Total variable costs	$551					$450
Contribution margin	$149					$150
Fixed costs:
Advertising	50					50
Depreciation	25					25
Lease	15					15
Salaries	15					15
Total fixed costs	$105					$105
Operating profit	$44					$45

champagnetiger982

Waterways Corporation is preparing its budget for the coming year, 2017. The first step is to plan for the first quarter of that coming year. Waterways gathered the following information from the managers:

Sales

Unit sales for November 2016 112,500

Unit sales for December 2016 102,100

Expected unit sales for January 2017 113,000

Expected unit sales for February 2017 112,500

Expected unit sales for March 2017 116,000

Expected unit sales for April 2017 125,000

Expected unit sales for May 2017 137,500

Unit selling price $12

Waterways likes to keep 10% of the next monthâs unit sales in ending inventory. All sales are on account. 85% of the Accounts Receivable are collected in the month of sale, and 15% of the Accounts Receivable are collected in the month after sale. Accounts receivable on December 31, 2016, totaled $183,780.

Direct Materials

Item Amount Used per Unit Inventory, Dec. 31

Metal 1 lb @ 58Â¢ per lb. 5,177.5 lbs

Plastic 12 oz @ 6Â¢ per oz 3,883.125 lbs

Rubber 4 oz @ 5Â¢ per oz 1,294.375 lbs

2 lbs per unit 10,355.0 lbs

Metal, plastic, and rubber together are 75Â¢ per pound per unit.

Waterways likes to keep 5% of the materials needed for the next month in its ending inventory. Payment for materials is made within 15 days. 50% is paid in the month of purchase, and 50% is paid in the month after purchase. Accounts Payable on December 31, 2016, totaled $120,595. Raw Materials on December 31, 2016, totaled 11,295 pounds.

Direct Labor

Labor requires 12 minutes per unit for completion and is paid at a rate of $8 per hour.

Manufacturing Overhead

Indirect materials 30Â¢ per labor hour

Indirect labor 50Â¢ per labor hour

Utilities 45Â¢ per labor hour

Maintenance 25Â¢ per labor hour

Salaries $42,000 per month

Depreciation $16,800 per month

Property taxes $ 2,675 per month

Insurance $ 1,200 per month

Janitorial (Maintenance) $ 1,300 per month

Selling and Administrative

Variable selling and administrative cost per unit is $1.60.

Advertising $15,000 a month

Insurance $ 1,400 a month

Salaries $72,000 a month

Depreciation $ 2,500 a month

Other fixed costs $ 3,000 a month

Other Information

* The Cash balance on December 31, 2016, totaled $100,500, but management has decided it would like to maintain a cash balance of at least $800,000 beginning on January 31, 2017.

* Dividends are paid each month at the rate of $2.50 per share for 5,000 shares

outstanding.

* The company has an open line of credit with Romneyâs Bank. The terms of the agreement requires borrowing to be in $1,000 increments at 8% interest. Waterways borrows on the first day of the month and repays on the last day of the month.

* A $500,000 equipment purchase is planned for February.

Instructions

For the first quarter of 2017, do the following.

(a) Prepare a sales budget.

(b) Prepare a production budget.

(d) Prepare a direct labor budget.

(e) Prepare a manufacturing overhead budget.

(f) Prepare a selling and administrative budget.

(g) Prepare a schedule for expected cash collections from customers.

(h) Prepare a schedule for expected payments for materials purchases.

(i) Prepare a cash budget.

viridianweasel194

ADM 3346 Lecture Notes - Lecture 16: Earnings Before Interest And Taxes, Contribution Margin, Fixed Cost

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