Question

In: Accounting

Woodplex Ltd is a medium-size company that specializes in making a hand-made furniture cover. The company...

Woodplex Ltd is a medium-size company that specializes in making a hand-made furniture cover. The company has been relatively successful over the years due to its good quality product and the good relations it has with its suppliers of materials and staff on the production line. Woodplex Ltd’s management, however, anticipates the market becoming more competitive in the near future, not least due to the weak UK economy and forecasts of slow growth. They are now seeking a way to lower the price of their product. A cheaper substitute material has been identified for the furniture cover but securing this material would involve signing a long-term contract with a new supplier. Woodplex Ltd’s management believe that it would be prudent to delay signing a long-term contract until an analysis can be made of how switching to a new material (and supplier) would affect the production process and operating profit. As a result of the above concern, the prospective supplier was therefore asked to supply Woodplex Ltd the materials they needed for production during the most recent quarter.

The managing director of Woodplex Ltd has now asked for your help on this matter. You have been provided with the following standard cost data (i.e., based on the old supplier) and budgets.

             £

Unit selling price

300.00

Less:

Direct materials: 2.5 metres @ £4.00 per metre

10.00

Direct labour: 5 hours @ £24.00 per hour

120.00

Variable overhead: £4.00 per direct labour-hour

20.00

Contribution

150.00

Budget

(based on old material/supplier)

Actual

(based on new material/supplier)

Output (production and sales)

           20,000 units

      22,000 units

Sales revenue

£ 6,000,000

£ 6,380,000

Less:

Direct materials

200,000

171,600

Direct labour

2,400,000

3,168,000

Variable overheads

400,000

501,600

Fixed overheads

160,000

164,000

Operating profit

£ 2,840,000

£ 2,374,800

[CONTINUED]

Additional information:

  • Actual direct material usage totalled 57,200 metres. All materials used during the quarter were sourced from the prospective supplier.
  • A total of 132,000 direct labour hours were worked during the quarter.
  • During the quarter, a promotional price for the furniture cover was introduced following the recommendation of Woodplex Ltd’s marketing director. The marketing director argued that this would not only boost sales but also provide an opportunity to evaluate how customers would respond to their product when the substitute material is used.
  • Woodplex Ltd uses a standard variable costing system for internal reporting purposes.

Required:

  1. Prepare a flexed budget that takes into account the change in output and sales during the quarter, based on the material from the new supplier.

  1. Calculate for the quarter:
    1. Sales margin price and volume variances
    2. Direct material quantity and price variances
    3. Direct labour efficiency and rate variances
    4. Variable overhead efficiency and spending variances
    5. Fixed overheads spending variance

  1. Drawing on your answers in (a) and (b) and any other financial or non-financial consideration you think would be relevant in this case, advise Woodplex Ltd whether or not it should sign a long-term contract with the new supplier.

Solutions

Expert Solution


Related Solutions

Woodplex Ltd is a medium-size company that specializes in making a hand-made furniture cover. The company...
Woodplex Ltd is a medium-size company that specializes in making a hand-made furniture cover. The company has been relatively successful over the years due to its good quality product and the good relations it has with its suppliers of materials and staff on the production line. Woodplex Ltd’s management, however, anticipates the market becoming more competitive in the near future, not least due to the weak UK economy and forecasts of slow growth. They are now seeking a way to...
John is the managing directors of Pearson Ltd, a medium size company which sells custom made Italian light fixtures.
Law questionJohn is the managing directors of Pearson Ltd, a medium size company which sells custom made Italian light fixtures. For the past 12 years, John has exclusively imported component parts from the Italian based company Lumitalia spA, who create innovative light fittings in a number of different designs and shapes.During the course of an annual visit to the Lumitalia spAoffices in Milan, John renegotiates his contract with EmilioSchwarza, the managing director of LumiatliaspA, and they agree Pearson Ltd will...
The Handy’s Woodworking Company is a small-to-medium sized custom furniture and cabinet making company, with head-office...
The Handy’s Woodworking Company is a small-to-medium sized custom furniture and cabinet making company, with head-office and a spacious plant site at Industrial Estates, Melbourne. It’s Chairman and Chief Executive Officer is Ron Haywood now in his late-sixties. His wife Mrs. Emy Haywood, being an aggressive business woman and somewhat younger than her husband, now effectively runs the company. Ron Heywood is affectionately known to all as "Handy" and so the company is generally known as "Handy's". Handy, after an...
Leather Ltd has been in business for many years making hand-made, high end, leather goods. One...
Leather Ltd has been in business for many years making hand-made, high end, leather goods. One of its products is a designer jacket. There are two divisions involved in the production of jackets, the Cutting Centre and the Stitching Division. Budgeted production for both divisions is 500 jackets per year. The Cutting Centre specialises in cutting out the unique designs and currently only supplies to the Stitching Division, which expertly hand stitches the product to make a jacket of exceptional...
You are the ISO for a medium size company that works in paper, but not any...
You are the ISO for a medium size company that works in paper, but not any paper but the paper that US dollars are made on. Write an incident flow chart for some catastrophes happening to your company. Include a flow chart based on the situation. You make up the catastrophe, man-made or nature or freak accident.
The Mahela Company specializes in producing sets of wooden patio furniture consisting of a table and...
The Mahela Company specializes in producing sets of wooden patio furniture consisting of a table and four chairs. The company has ample orders to keep production going at its full capacity of 2,200 sets per quarter. Quarterly cost data at full capacity follow:      Factory labour, direct $ 119,000   Advertising 50,200   Factory supervision 40,200   Property taxes, factory building 3,700   Sales commissions 81,000   Insurance, factory 2,700   Depreciation, office equipment 4,200   Lease cost, factory equipment 12,200   Indirect materials, factory 6,200   Depreciation, factory...
The Mahela Company specializes in producing sets of wooden patio furniture consisting of a table and...
The Mahela Company specializes in producing sets of wooden patio furniture consisting of a table and four chairs. The company has ample orders to keep production going at its full capacity of 2,600 sets per quarter. Quarterly cost data at full capacity follow:      Factory labour, direct $ 121,000   Advertising 50,600   Factory supervision 40,600   Property taxes, factory building 4,100   Sales commissions 83,000   Insurance, factory 3,100   Depreciation, office equipment 4,600   Lease cost, factory equipment 12,600   Indirect materials, factory 6,600   Depreciation, factory...
The Dorilane Company specializes in producing a set of wood patio furniture consisting of a table...
The Dorilane Company specializes in producing a set of wood patio furniture consisting of a table and four chairs. The set enjoys great popularity, and the company has ample orders to keep production going at its full capacity of 2,000 sets per year. Annual cost data at full capacity follow: Direct labor $ 118,000 Advertising $ 50,000 Factory supervision $ 40,000 Property taxes, factory building $ 3,500 Sales commissions $ 80,000 Insurance, factory $ 2,500 Depreciation, administrative office equipment $...
The Mahela Company specializes in producing sets of wooden patio furniture consisting of a table and...
The Mahela Company specializes in producing sets of wooden patio furniture consisting of a table and four chairs. The company is currently operating at 80% of its full capacity of 2,400 sets per quarter. Quarterly cost data at this level of operations follow: Factory labour, direct $ 120,000 Advertising 50,400 Factory supervision 40,400 Property taxes, factory building 3,900 Sales commissions 82,000 Insurance, factory 2,900 Depreciation, office equipment 4,400 Lease cost, factory equipment 12,400 Indirect materials, factory 6,400 Depreciation, factory building...
The Dorilane Company specializes in producing a set of wood patio furniture consisting of a table...
The Dorilane Company specializes in producing a set of wood patio furniture consisting of a table and four chairs. The set enjoys great popularity, and the company has ample orders to keep production going at its full capacity of 3,900 sets per year. Annual cost data at full capacity follow:      Direct labor $ 89,000      Advertising $ 102,000      Factory supervision $ 66,000      Property taxes, factory building $ 19,000      Sales commissions $ 63,000      Insurance, factory $...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT