Sam Leaf, the president of Ginkgo Manufacturing Limited, was very pleased but puzzled by the 2012 operating results (Exhibit 12A-1). He knew that both manufacturing and marketing had problems during the year and he had not anticipated that the actual income from operations would exceed the budget. Sam placed a lot of importance on his managers’ staying within the budget to ensure that the target profit was attained. 

Ginkgo manufactured two product lines—chlorine and bromine pellets —for home swimming pools. Production and sales were measured in kilograms, with the bromine being more expensive. The controller prepared a budget each December for the following year, but it was difficult to forecast sales, which were largely determined by the weather. As well, the mix of sales was difficult to forecast because of unpredictable switching of demand from one product to the other. In consultation with the sales manager, an estimate was made of total market sales in kilograms and the share each of Ginkgo’s two products would achieve. From the resulting sales forecast, the budget was prepared. The fixed and variable cost elements in the budget were based on adjustments to the current year’s figures to reflect the best estimates for the following year. 

During 2012, the production schedule had to be changed numerous times to match sales demand. This had resulted in production problems and waste. The sales manager had attempted to stimulate sales of the higher-priced bromine and was pleased with the excess sales over budget. 

Sam asked his controller to provide him with a detailed analysis of operating results and a recommendation for awarding bonuses to the sales and production managers. As a first step, the controller put together the original underlying budget cost and revenue estimates, and the actual 2012 data, which he obtained from the cost records and trade statistics (Exhibit 12A-2). 

1. Prepare a 2012 flexible budget for Ginkgo based on the data in the two exhibits. Your flexible budget should include columns for the two product lines as well as for the company overall. 

2. Prepare a profit variance analysis. Explain the causes of the variances, identifying the effect of market factors as well as responsibility for variances between marketing and production.

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Exhibit 12A-1 Ginkgo Manufacturing Limited Operating Results for the Year Ended December 31, 2012 Static Budget Actual Sales in units (kilograms) 1,425,000 1,920,000 Sales in dollars $17,575,000 $24,672,000 Variable costs: Manufacturing Selling 10,022,500 13,440,000 4,560,000 7,968,000 Total variable costs 14,582,500 21,408,000 Contribution margin 2,992,500 3,264,000 Fixed costs: Manufacturing Selling 550,000 565,000 345,000 370,000 Administration 150,000 140,000 Total fixed costs 1,045,000 1,075,000 Income from operations $ 1,947,500 $ 2,189,000 Exhibit 12A-2 Ginkgo Manufacturing Limited 2012 Sales, Cost, and Market Data Static Budget Actual Chlorine Bromine Chlorine Bromine Variable costs per kilogram: Manufacturing Selling Selling price per kilogram $ 5.75 $ 8.50 $ 6.25 $ 7.50 2.50 4.00 2.50 5.25 $10.00 $15.00 $10.00 $14.75 Sales and Market Volumes (Market Share) Budgeted Kilograms Actual Kilograms Ginkgo’s sales volume: Chlorine 760,000 (8%) 768,000 (8%) 1,152,000 Bromine 665,000 (7%) (12%) 9,600,000 Total market volume 9,500,000 (100%) (100%)