DFD make one product, the product is expensive, but the company have an excellent reputation for quality
Question:
DFD make one product, the product is expensive, but the company have an excellent reputation for quality and service. The company have always claimed that their staff were their most valuable asset and it is only because of them that they have been able to maintain their position as market leader over the past 20 years.
The company is profitable, and they are still the market leaders however revenues have plateaued over the last few years. To remedy the situation, they hired Yiling Song as the new CEO at the start of the financial year. Yiling Song, who has a background in sales, has a reputation for making tough decisions. At her first board meeting she stated "this company has grown flabby in middle age. We are lazy, we waste far too much on overhead which does not add value and we aren't aggressive enough with price" Yiling Song is very pleased with the performance in the first quarter but you believe that there are some under lying problems. Below is the data for the first quarter:
Budget | Actual | |
Units | 100,000 | 115,000 |
Sales | £2,100,000 | £2,322,600 |
Materials | £1,200,000 | £1,384,600 |
Labour | £330,000 | £349,600 |
£1,530,000 | £1,734,200 | |
Gross Profit | £570,000 | £588,400 |
Overheads | ||
Production Supervision & Engineering | £108,000 | £93,120 |
Quality Control | £32,000 | £21,600 |
General Production Overhead | £82,000 | £74,900 |
Sales & Marketing | £102,000 | £109,020 |
Finance & Administration | £76,000 | £66,680 |
| £400,000 | £365,320 |
Profit | £170,000 | £223,080 |
Notes
1. In quarter one 2,142 units were returned by customers. These were scrapped and replaced with new product. Last year 0.2% of products were returned.
2. Historically the company’s trade receivable days were between 38 and 42 days, but it has risen to 52 days in the first quarter
3. Sales staff have been given the authority to discount the sales price by up to 10%. Discounts greater than 10% must be signed off by the sales director
4. Yiling Song has told the departmental managers that she wants to reduce the direct labour and fixed costs by 10% compared to the budget. To help achieve this the company has made redundancies in all departments except for sales and marketing.
5. Yiling Song has introduced a new bonus scheme for the sales team and the sales director. If the sales revenue is 10% greater than the budget at the end of the financial year the sales director will also receive a £20,000 bonus and there will be a £50,000 team bonus which the sales director can distribute as he sees fit. There is no bonus scheme for the other departments.
6. Yiling Song’s remuneration package rewards her for increases in sales revenue.
Required:
lex the budget to produce a statement which makes valid comparison between the budget and the actual costs and shows the variance (15 marks)
Statistics for Business and Economics
ISBN: 978-0321826237
12th edition
Authors: James T. McClave, P. George Benson, Terry T Sincich