I just don€™t understand these financial statements at all! exclaimed Mr. Elmo Knapp. Mr. Knapp explained that he had turned over management of Racketeer, Inc., a division of American Recreation Equipment, Inc., to his son, Otto, the previous month. Racketeer, Inc., manufactures tennis rackets.
€œI was really proud of Otto,€ he beamed. €œHe was showing us all the tricks he learned in business school, and if I do say so myself, I think he was doing a rather good job for us. For example, he put together this budget for Racketeer, which makes it very easy to see how much profit we€™ll make at any sales volume (Exhibit 17.8). As best as I can figure it, in March we expected to have a volume of 8,000 units and a profit of $14,500 on our rackets. But we did much better than that! We sold 10,000 rackets, so we should have made almost $21,000 on them.€

a Standard costs are calculated for an estimated production volume of 8,000 units each month.
b Fixed costs. €œAnother one of Otto€™s innovations is this standard cost system,€ said Mr. Knapp proudly. €œHe sat down with our production people and came up with a standard production cost per unit (see Exhibit 17.9). He tells me this will let us know how well our production people are performing. Also, he claims it will cut down on our clerical work.€
Mr. Knapp continued, €œBut one thing puzzles me. My calculations show that we should have earned profit of nearly $21,000 in March. However, our accountants came up with less than $19,000 in the monthly income statement (Exhibit 17.10). This bothers me a great deal. Now, I€™m sure our accountants are doing their job properly. But still, it appears to me that they€™re about $2,200 short.
€œAs you can probably guess,€ Mr. Knapp concluded, €œwe are one big happy family around here. I just wish I knew what those accountants were up to . . . coming in with a low net income like that.€
Required
Prepare a report for Mr. Elmo Knapp and Mr. Otto Knapp that reconciles the profit graph with the actual results for March (see Exhibit 17.11). Show the source of each variance from the original plan (8,000 rackets) in as much detail as you can and evaluate Racketeer€™s performance in March. Recommend improvements in Racketeer€™s profit planning and controlmethods.

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RACKETEER, INC Income Statement, For the Month of March- Actual Sales 10,000 rackets at $9 Standard cost of goods sold $90,000 10,000 rackets at $6.25 Gross profit after standard costs 62,500 $27,500 Variances (490) (392) (660) $25,958 7,200 $18,758 Materials variance Labor variance Overhead variance Gross profit. Selling and administrative expenses Operating profit.. .. Direct materials purchased and used Stringing materials Frames (some frames were ruined during production) Labor Skilled ($9.80 per hour) Unskilled ($5.80 per hour) .. 175,000 feet at 2.5c per foot 7,100 at $3.15 per frame . .- 900 hours 840 hours Overhead Power Depreciation Supervision. $ 800 $ 260 $1,600 $ 960 $1,250 Other.. . . Production 7,000 rackets