Question

Question 1:

Black Falcon Pty Ltd makes premium range dog biscuits used to provide high level nutrition for dogs, which it introduced to the market in 2016 in the highly competitive premium dog food market. Black Falcon realises that it would be competing against well-known brands that have held market share based on their reputation for many years.  From the feedback received at trade fairs during 2017, Black Falcon has been generally regarded as an equal standard of quality as the other premium providers.  However, the product was initially provided at a low introductory price to encourage customers and retailers to purchase Black Falcon’s dog food. Black Falcon is now seeking to increase the price each year as the firm’s reputation grows.

Black Falcon produces very few defective products and insists upon the highest quality materials from its suppliers. Conversion Costs in each year depend on production capacity defined in terms of units that can be produced, not the actual units produced. Selling and customer-service costs depend on the number of customers that Black Falcon can support, not the actual number of customers it serves. See Table 1 below for information.

Table 1 - Performance and cost details for 2-year period	2018	2019
Number of bags produced and sold	13500	15000
Selling price	$125	$135
Direct materials (20 kilograms per bag)	540,000	630,000
Direct materials cost per kilogram	$2.00	$2.10
Units of Manufacturing practical capacity	15,000	15,000
Total conversion costs	$129,000	$132,000
Conversion indirect overhead cost per unit of capacity (Standard fixed capacity cost per unit)	$8.60	$8.80
Customer number capacity for selling and customer-service	4,300	4,200
Total selling and customer-service costs	$8,200	$7,600
Selling and customer-service capacity cost per customer (Standard fixed capacity cost per unit)	$1.91	$1.81

REQUIRED:

1. Identify the business strategy adopted by Black Falcon PtyLtdand explain briefly how you reached your decision on the type of business strategy adopted.   
2. Calculate the operating profit for the two accounting years.
3. Prepare the variances for the change in profit between the two years due to the growth strategy.
4. Prepare the variances to reconcile the change in profit between for the two accounting years due to the productivity strategy.
5. Discuss the change in Black Falcon’s operating profitfor the two accounting years.

Answer 1

The strategy followed by Black Falcon is penetration strategy. Penetration pricing strategy is a strategy where the price of the product is kept lower in the initial stage to grab a large market share. Here, the price is kept low by black falcon to encourage customers and retailers to purchase Black Falcon’s dog food.

I reached to this decision as the price was lower as compared to competitor's product.

Black Falcon Pty Ltd
Operating income statement
Particulars	2018	2019
Sales
13500*125	1687500
15000*135		2025000
Total revenue	1687500	2025000
Operating expenses:
Direct material
20*13500*2	540000
20*15000*2.1		630000
Conversin cost (Fixed)	129000	132000
Selling and customer support cost	8200	7600
Total operating expenses	677200	769600
Net profit	1010300	1255400
(Total revenue - Total operating expenses)

Profit variance is calculated below:

1. Sales volume variance = (actual sales - budget sales) * 2018's sales price

                                         '= (15000-13500) * 125

                                         '=$187500 Favorable

2. Cost volume variance = (Actual sales – Budget Sales) × Budget cost per unit

                                       '= (15000-13500) * 40

                                       '= $60000 Unfavorable

Net impact on profit = 187500- 60000 = $127500

Change in accounting profit( reconciliation)

2018's profit =                                                                 $1010300

Add:1. Sales price variance                                            $150000

Sales price variance = (Actual price – Budget price) × Actual sales
		= (135-125) * 15000
		= 150000 F

2. Sales volume variance (calculated above)                 $187500

3. Overhead variance

   (a) Selling and customer support cost's variance

         = 2018's cost - 2019's cost

          = 8200-7600 =                                                        $600

Less:

4. Cost price variance                                                     $ 30000

Cost price variance = (Actual cost – Budget cost) × Actual sales
		= (42-40) * 15000
		= $ 30000 F

5. Cost volume variance(calculated above)                     $60000

6. Overhead variance

    (a) Conversin cost variance

        = 2018's cost - 2019's cost

        = 129000-132000 =                                                $3000

2019's Profit                                                                   $1255400