Here's the best solution from Chegg's library

Solution

Exhibit 16.16 Standard Cost Sheetagm.com

Selling price				$25.00
Materials
Reed (pounds per unit)	0.4 pounds @ $5	$2.00
Handle		4.10	$6.10
Direct labor	0.5 hours @ $12		6.00
Variable overhead	0.5 hours @ $1		0.50
Fixed overhead			2.00
Total standard cost				14.60
Standard gross profit per unit				$10.40

Page 707

Exhibit 16.17 Operating Budget, First Quarteragm.com

Budgeted sales and production		8,000 baskets
Revenue		$200,000
Variable costs
Materials	$48,800
Labor	48,000
Variable overhead	4,000	100,800
Budgeted contribution margin		$ 99,200
Fixed overhead		16,000
Budgeted gross profit		$ 83,200
Marketing and administration		90,000
Operating profit (loss)		$ (6,800)

Because of the strike, the site went off the air. It was one week before supervisors were able to get the site back up. Although difficult to estimate, Mary suggested in a message to AGM Enterprises that the company lost about 5 percent in unit sales (i.e., about 400 baskets). She based this estimate on the fact that lines were down 7 days of the quarter (about 7.7 percent) but that some of the customers that were not able to connect would return when service was restored. Others would simply click on the next site their search engine identified.

In order to try and counteract some of the negative publicity that had occurred, agm.com offered some concessions to customers. One concession was free shipping on all orders over $100. (Initially, shipping was billed to the customer at cost.) This added $13,000 to the Marketing and Administration expenses for the quarter. Also, at Mary's request, additional marketing campaigns costing $32,000 were launched in craft magazines and on cable television. These efforts helped make up for the lost sales.

As sales were falling, the company was also hit by the booming economy in the state when the basket makers were finding better part-time employment in the local industries. As a result, agm.com had to increase the wage rate simply to maintain production.

Not all the news was bad, however. Mary had immediately identified a modification in the production process at the Pennsylvania workshop that reduced the scrap on each basket by 20 percent. This modification was used on all baskets produced in the quarter. (In the original process, scrap occurred in the initial cutting of the material and, therefore, no labor was lost because of the scrap.) In addition, she maintained the level of quality, so the company received no returns and many comments about future purchases. Still, she was concerned that this poor first-quarter showing was going to be difficult to make up.

I came here because I wanted to work at a company that, first, I had a significant ownership stake in and, second, would allow me to pursue my interest in the craft of basket weaving full-time. I'm afraid that, because of the strike, I won't meet the first year budget and will lose my bonus shares. I think Maya is a fair person, but she has to answer to the other owners. They might not be so willing to assume that these results are because of events out of my control.

Exhibit 16.18 shows the actual results for the quarter. The actual direct (materials and labor) production inputs are shown in Exhibit 16.19. Actual total variable overhead for the quarter was $5,760 and actual fixed overhead was $16,000.

Exhibit 16.18 Actual Results, First Quarteragm.com

Actual sales and production	8,000
Revenue	$176,000
Standard cost of goods sold	116,800
Gross profit	$ 59,200
Production cost variances	12,960
Marketing and administration	135,000
Operating profit (loss)	$ (88,760)

Page 708

Exhibit 16.19 Actual Direct Production Quantities and Costsagm.com

Input	Quantity	Total Actual Cost
Materialsa
Reed	2,400 pounds	$11,520
Handle	8,000 handles	31,200
Direct labor	4,800 hours	65,280

^a All materials used in production. There are no materials or work-in-process inventories.

Next Steps

As Maya contemplates the future of the new distribution channel, she is concerned as well about the effect of the first quarter on her agreement with Mary.

I would really like the answer to just one question: Should we rewrite our agreement? From what I have seen, Mary is really dedicated to the business. On the other hand, an agreement is an agreement. If we revise it now, what kind of problems will we have in the future?

Required

a.What were the factors that caused actual quarterly income to be less than budgeted? Quantify the effect of each of these factors. Be as specific as possible.

b.For which of these factors, if any, should Mary be held responsible?

c.Should Maya rewrite the agreement with Mary?