The May 2011 income statement for Barbex Company is given below:
Sales (10,000 units) $100,000
Less variable costs 70,000
Contribution margin 30,000
Less fixed costs 24,000
Net income $6,000
The Barbex Company has ample unused capacity and is studying various ways of improving profits.
Each of the situations below is independent of the other. Provide the information requested.
1. New equipment has come onto market that would allow Barbex Company to automate a portion of its operations. Variable costs could be reduced by $3 per unit. However, fixed costs would increase by $30,000 each month. Firstly, prepare two contribution-type income statements, one showing present operations and one showing how operations would appear if the new equipment is purchased. Secondly, as a manager, what factors would be paramount in your mind in deciding whether to purchase the new equipment? Explain.
2. Refer to the original data. Barbex Company is thinking about changing its marketing method. Under the new method sale would increase by 15 percent each month, and net income would increase by one third. Fixed cost could be slashed to only $15,000 per month. Calculate the break-even point for the company before and after the change in marketing method.
3. Refer to the original data. Due to a sudden and unprecedented surge in demand, the company’s sales increased by 25 percent during June 2011. During that month, net income increased by $3,000, or by 50 percent. By how much should net income have increased? Would you congratulate management for an outstanding performance, or would you chastise management for not doing its job well during the period? Explain.
QUESTION 2 (6 MARKS)
Ballina Products manufactures and distributes toys to retail outlets. One of the company’s products, RC Helicopter, requires 3 kilograms of material A in the manufacture of each unit. The company is now planning raw material needs for the third quarter of 20x1, the quarter in which peak sales of RC Helicopters occur. In order to keep production and sales moving smoothly, the company has the following inventory requirements:
a. The finished goods inventory on hand at the end of each month must be equal to 5,000 units plus 25 percent of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 13,750 units.
b. The raw materials inventory on hand at the end of each month must be equal to one half of the following month’s production needs for raw materials. The raw materials inventory on June 30 is budgeted to be 54,375 kilograms.
c. The company maintains no work in process inventories.
A sales budget for RC Helicopter for the last six months of 20x1 is given below:
Budgets sales in units
1. Prepare a production budget for RC Helicopter for the months July-October.
2. Examine the production budget which you prepared in (1) above. Why will the company produce more units than it sells in July and August, and less units than it sells in September and October?
3. Prepare a budget showing the quantity of material A to be purchased for July, August, and September 20x1 and for the quarter in total.
Question 3 (6 Marks)
North Coast Surfers is a company that produces high-quality surf boards. North Coast Surfers participates in a supply chain that consists of suppliers, manufacturers, distributors and elite surf shops. North Coast Surfers uses carbon fibre for the surf boards because it is strong and light and therefore increases the quality of the surf boards. North Coast Surfers has recently hired Janet Jackson as purchasing manager. Janet believes that she could reduce costs if she purchased carbon fibre from an online marketplace at a lower price. North Coast Surfers has set up the following standards based upon their experience with their previous suppliers. The standards are:
Cost of carbon fibre $20 per kilogram
Carbon fibre used per surf board 8kg
Actual results for the first month using the online supplier of carbon fibre are:
Surf boards produced 500
Carbon fibre purchased 6000kg for $108,000
Carbon fibre used in production 5,000 kg
- Calculate the direct materials price and efficiency variances
- What factors can explain the variances identified in requirement 1? Could any other variances be affected?
- Is switching suppliers a good idea for North Coast Surfers? Explain why or why not.
- Should Janet Jackson’s performance evaluation be based solely on price variance? Should the production manager’s evaluation be based on efficiency variances? Why it is important for the management of North Coast Surfers to understand the causes of a variance before they evaluate performance? Explain.
- Other than performance evaluation, what other reasons are there for calculating variances?
- What future problems could result from North Coast Surfer’s decision to buy a lower grade carbon fibre from the online marketplace?
Question 4 (7 marks)
Explain Transfer Pricing, describe the advantages of negotiated transfer pricing, and discuss the international aspects of transfer pricing. You must use real world examples to support your discussions and disclose the source of your information.