Question

Sal Amato operates a residential landscaping business in an affluent suburb of St. Louis. In an effort to provide quality service, he has concentrated solely on the design and installation of upscale landscaping plans (e.g., trees, shrubs, fountains, and lighting). With his clients continually requesting additional services, Sal recently expanded into lawn maintenance, including fertilization.

The following data relate to his first year’s experience with 55 fertilization clients:

• Each client required nine applications throughout the year and was billed $40.00 per application.

• Two applications involved Type I fertilizer, which contains a special ingredient for weed control. The remaining seven applications involved Type II fertilizer.

• Sal purchased 6,800 pounds of Type I fertilizer at $0.55 per pound and 11,800 pounds of Type II fertilizer at $0.45 per pound. Actual usage amounted to 5,550 pounds of Type I and 8,700 pounds of Type II.

• A new, part-time employee was hired to spread the fertilizer. Sal had to pay premium wages of $13.30 per hour because of a very tight labor market; the employee logged a total of 201 hours at client residences.

• Based on previous knowledge of the operation, articles in trade journals, and conversations with other landscapers, Sal established the following standards:

• Fertilizer purchase price per pound: Type I, $0.68; Type II, $0.46
• Fertilizer usage: 58 pounds per application
• Typical hourly wage rate of landscape personnel: $9.70
• Labor time per application: 40 minutes

• The operation did not go as smoothly as planned, with customer complaints actually much higher than expected.

Required:

1. 1. Compute Sal’s direct-material variances for each type of fertilizer : Type I and Type II

2. 1. Direct material price variance

3. 2. Direct material quantity variance

4. 3. Direct material purchase price variance

5. 4. Direct labor rate variance

6. 5. Direct labor efficency variance

7. 2. Compute the direct-labor variances.

8. 3-a. Compute the actual cost of the client applications. (Note: Exclude any fertilizer in inventory, as remaining fertilizer can be used next year.)

9. 3-b. Calculate the profit or loss of Sal’s new lawn fertilization service.

10. 4. On the basis of the variances that you computed in parts (1) and (2) was the new service a success from an overall cost-control perspective?

11. 5. Should the fertilizer service be continued next year?

Answer 1