Gates Video Games manufactures video game machines. Market saturation and technological innovations have caused pricing pressures that


Gates Video Games manufactures video game machines. Market saturation and technological innovations have caused pricing pressures that have resulted in declining profits. To stem the slide in profits until the company can introduce new products, top management has turned its attention to both manufacturing economies and increased production. To realize these objectives, management developed an incentive program to reward production managers who contribute to an increase in the number of units produced and achieve cost reductions. In addition, the company instituted a JIT purchasing program so that it purchases raw materials on an as-needed basis.

The production managers have responded to the pressure to improve manufacturing performance in several ways that have resulted in an increase over normal production levels. The video game machines put together by the assembly group require parts from both the printed circuit boards (PCB) and the reading heads (RH) departments. To attain increased production levels, the PCB and RH departments started rejecting parts from suppliers that previously would have been tested and modified to meet manufacturing standards. Preventive maintenance on machines used in the production of these parts has been postponed with only emergency repair work being performed to keep production lines moving. The maintenance staff is concerned that there will be serious breakdowns and unsafe operating conditions.

The more aggressive assembly group production supervisors have pressured maintenance personnel to attend to their machines at the expense of other groups. This has resulted in machine downtime in the PCB and RH departments which, when coupled with demands for accelerated parts delivery by the assembly department, has led to more frequent parts rejections and increased friction among departments. Gates Video Games operates under a standard-costing system. The standard costs at a production level of 24,000 units per year are in part A of Exhibit 8-13.

Gates Video Games prepares monthly income statements based on actual expenses. Part B of Exhibit 8-13 shows the statement for May, when production and sales both reached 2,200 units. The budgeted sales price was $200 per unit, and budgeted (normal) production and sales were 24,000 units per year. Top management was surprised by the low profit in spite of increased sales for May. The original budget had called for income before taxes of $62,000, and with the added sales, the president had expected at least $68,200 of income ($6,200 more income; 200 extra units * $31 per unit).

The president called on Michelle Barber, director of cost management, to report on the reasons for the shortfall in income. After a thorough review of the data, Barber prepared the report in part C of Exhibit 8-13.

1. Prepare a budgeted income statement in contribution margin format for Gates Video Games showing why the company expected income before taxes to be $62,000.

2. Assume that you have been given Michelle Barber’s task. Prepare a complete analysis explaining the reason for the difference between the original projected income before taxes of $62,000 and the actual of $47,740. Compute all the variances that are helpful in explaining this difference, and explain what you learn from the variances.

Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Introduction to Management Accounting

ISBN: 978-0133058789

16th edition

Authors: Charles Horngren, Gary Sundem, Jeff Schatzberg, Dave Burgsta

Question Posted: