Freedom Tents Ltd was founded over 10 years ago with the principal aim of supplying economical single
Freedom Tents Ltd was founded over 10 years ago with the principal aim of supplying economical single use tents for musical festival attendees. Events organisers suggested that many tents were abandoned at the end of the festival , representing a disposal cost for the organisers not to mention environmental waste . However, in a recent drive to protect the environment the company has produced an environmentally friendly version which can either be recycled or re-used. The company were tremendously excited about the eco-tent and the product was well received by the press. Despite this , the product has failed to breakeven and the management team are very concerned . At a recent management meeting the CEO stated that we need positive cash flow to generate dividends for our shareholders and this product isn’t even breaking even , we should cease production of the eco-tent and concentrate our efforts on our existing product range.
The data below relates to the Eco-tent budgeted and actual performance in 2020:
Standard cost per unit :
Quantity cost. Total
Raw materials, metres 10 14.5 145
Direct labour wages, hours 2 11 22
Total standard variable cost/unit 167
Standard selling price. 300
Fixed Overhead for the Ec0-tent for the year 215,000
Budgeted sales volume for the year 1,700
Actual data for the product ECO-tent for the period
Sales; units 1,500. 450,000
Raw materials metres. 16,800 252,000
Direct labour wages: hours 3,750 45,000
Fixed overhead for the Eco-tent for the year 220,000
- The company has recently introduced (JIT) System for raw material purchases and does not hold any stock of raw materials
- Fixed overhead relates to activities which supports all of the products made by freedom Tents Ltd . (including purchasing, stores , human resource management, accounting sales and admin costs etc.) it is allocated to products on the basis of percentage of sales revenue. The total overhead of the company was budgeted at £500,000 in 2020 but actual cost was 600,000. If the Eco-tent was discontinued , this would fall by £300,000.
- In response to relatively poor sales volumes , the company recently cut costs in social media marketing and customer service
- Depreciation is included in fixed overheads , the budgeted and actual depreciation cost in 2020 was £55,000
- Their main competitor in market sells a very similar product for £290 per unit initial market research indicates that if they matched this price , sales volume s would increase to at least 2,000 units in 2021.
- 8% of products were returned during the period . Returns must be collected , booked into stock , inspected and reworked before being sent back to the customer .The industry average return rate is 3%
- 1,400 of the orders were delivered on time in 2020. The industry average on time delivery rate is 99%
- They have 12 direct staff. They had 275 sick days in 2020 and staff work 265 days per year . The industry average sickness days is 1.9%
- Calculate the following variances for the period – selling price , sales volume profit, material price, material usage , labour rate , labour efficiency , fixed overhead expenditure and fixed overhead volume ( round to 2 decimal places )
- Identify and justify 3 additional ( not calculated for part a) KPIs which may help freedom Tents ltd measure performance.