New Look Jacket Inc.
Analysis a Business Issue.
New Look Jacket Inc. (NLJ) specializes in the production of Nylon Jackets and Leather Jackets. The company delivers successful financial records at the end of the 2012 fiscal year with the net income of $417,100, which is $170,850 greater than the net income budgeted for the 2012 fiscal year despite that the company operations goes through some turmoil. A more detail variance shows that the external factor largely responsible for the growth of leather markets that rapidly increase than anticipated making NLJ to catch with the increase in market demand.
Variance Analysis
Contribution Margin
Based on the figure in Exhibit 1, the total amount of contribution margin for the Nylon jackets is $4,350 less than the budget. Although, the actual unit of contribution margin is $0.15 greater than the standard due to the lower admin cost and selling per unit. However, the Leather jackets’ total contribution margin is $325,200 higher than the budget. The actual unit for contribution margin is $12.70 less than the standard because of the higher variables in all the business categories.
Sale Variances
Analysis of sale variance reveals that New Look Jackets record 110,000 actual sale volumes greater that sale volume of 100,000 budgeted for the fiscal year. The favorable variance of 10,000 makes the company to record the increase in the sales revenue for the actual budget. The company recorded $5,747,500 as actual revenue compared to $4,075,000 budgeted as sale revenue making the company to record the favorable variance of $1,672,500 in revenue.
Despite the favorable sale variance that the company records, it is only the Leather Jacket that records favorable variance because the budgeted sale volume is 5,000 units and the actual sale volume is 16,500 units making the company to record a favorable variance of 11,500 in the sale volume. However, the variance for the sales of Nylon jacket is unfavorable with the budget of 95,000 units for the sale volume and the actual budget recorded are 93,500 units making the company to record the unfavorable variance of 1,700 units in sales.
Thus, the sales mix variance is favorable for the Leather jackets, however, unfavorable for the Nylon jacket. The company recorded unexpectedly high in the market of Leather Jacket in 2012 generating favorable mix market for the company.
The direct material price is not favorable for the New Look Leather jackets showing that the company spends more in purchasing of direct materials than the price actually budgeted for Leather jackets. The major reason is that the company did not have enough material in stock to produce the quantity of leather jacket demanded. Due to the abnormal increase in demand for the Leather jacket, the company had to make a rush order for the Leather jacket material which consequently led to the increase in the price of direct materials.
2. Budget projections for Sales, Direct material, Direct labor, Variable costs and Fixed Cost.
The paper prepares a new budget for the New Look Jacket based on the company past financial performances and the economic outlook for the 2012 fiscal year. The results of the variance analysis between the 2012 budget and the actual budget at the end 2012 fiscal year is also used to prepare the new budget.
Assumptions
The paper prepares the new budget based on the following assumptions:
The increase in inflation will not be more than 5% and increase in inflation is assumed to affect the projected fixed costs of operations. The sale volume of Leather jacket is assumed to reach 30,000 units. Essentially, the company did not prepare for the increase in the demand for the Leather jacket in the preceding year, and it is assumed a new trend in fashion will affect the demand for the Leather jackets, which will lead to an increase in the demand for the Leather jackets. The other assumption is that the U.S. economy will not experience a recession that may affect the total demand. Moreover, the income tax will remain the same because the increase in income tax is likely to decline the total demand.
The data in the new budget reveals that the company will realize the total sales volume of 123,500 units in both the Nylon Jacket and Leather jacket. However, it is projected that the demand for the Leather jacket will reach 30,000 units making the company to record the revenue of $4.5 Million in the Leather jacket. The increase in the demand for the Leather jacket will make the company to realize the revenue of more than $7.77 Million. (See Appendix 1 reveals the new budget and Appendix 2 reveals the costs of direct materials and direct labor).
Despite the increase in the company total revenue, the company will incur an increase in the cost of direct material and direct labor due to a projected increase in the total demand for the Leather jacket. Moreover, the total fixed costs are projected to increase to $1.5 Million due to 5% increase in inflation. Despite the increase in the total costs, the company is projected to record a net income of $518,419.
Reference
Foster, H. & Teall, D. G (2012). Cost Accounting: A Managerial Emphasis, (5th Canadian Edition). Canada, (CMA Online Library).
Appendices
Appendix 1: Budget Projections
Nylon Jacket
Leather Jacket
Total
Sales volume
93,500
30,000
123,500
Sales revenue
$3,272,500
$4,500,000
7,772,500
Direct materials
654,500
1,788,000
2,442,500
Direct Labor
748,000
1,320,000
2,068,000
Variable Overhead
561,000
217,500
778,500
Variable Selling & Admin
163,625
270,000
433,625
Total variable costs
2,127,125
3,595,500
5,722,625
Contribution margin
$1,145,375
$904,500
$2,049,875
Fixed Overhead
1,178,740
Fixed Selling & Admin.
352,716
Total Fixed Costs
$1,531,456
Net Income
$518,419
Appendix 2: Estimation of Direct material, Direct labor and Variable Costs for the New Budget
Budget Projections
Nylon Jacket
Leather Jacket
Direct material quantity
2.8 meters
2.6 meters
Standard price/meter $2.50
$23.00
Direct material
2.8 meters @ $2.50 per meter= $7
2.6 metres @ $23.00 per metre = $59.8
Direct labor hours
1-hour
2.2 hours
Standard rate/hour $8.00
$20.00
Direct labor
8
44
Standard variable overhead cost
$6.00
$7.25
Variable selling and admin
$1.75
$9.00
Appendix 3
Nylon
Jackets
Leather
Jackets
Total
Sales volume
95,000
5,000
100,000
Sales revenue
$3,325,000
$750,000
$4,075,000
Direct materials
665,000
250,000
915,000
Direct Labor
760,000
200,000
960,000
Variable Overhead
570,000
30,000
600,000
Variable Selling & Admin
166,250
37,500
203,750
Total variable costs
2,161,250
517,500
2,678,750
Contribution margin
$1,163,750
$232,500
$1,396,250
Fixed Overhead
900,000
Fixed Selling & Admin.
250,000
Net Income
$246,250
Appendix 4
2012 Detailed Variance Report
Nylon Jackets
Leather Jackets
Total
Sales price
0
0
0
Sales volume Mix:
$134,750 U
$511,500 F
$376,750 F
Quantity
116,375 F
23,250 F
139,625 F
Total sales volume
$18,375 U
$534,750 F
$516,375 F
*Sales Quantity Variance:
Market share
$349,063 U
Market size
$488,688 F
Total
$139,625 F
Direct materials:
Price
$44,550 U
$44,550 U
Usage
66,000 U
66,000 U
Total direct materials
$110,550 U
$110,550 U
Direct labor:
Rate
$99,000 F
$99,000 F
Usage
165,000 U
165,000 U
Total direct labour
$66,000 U
$66,000 U
Variable overhead
$16,500 U
$16,500 U
Variable selling and admin
$14,025 F
$16,500 U
$2,475 U
Fixed overhead
$100,000 U
Fixed selling and admin.
$50,000 U
Total variance from budget
$170,850 F
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