Question

Prepare a flexible budget and show variances for the year that passed. Indicate whether the flexible budget variances are favorable or unfavorable.

Headquarters are contemplating charging each store a 5% marketing expense based on sales. How will that affect the operating profit of the store and the money available for managerial bonuses based on actual results for the past year? Summarize the information in a table.

(INFORMATION PROVIDED BELOW)

T&P Fashion Shops is a new chain that operates 10 stores in major malls throughout the United States. Each store manager is responsible for preparing a flexible budget for the store. T&P headquarters accumulates and analyzes the information for each store and in the aggregate.

Below is the forecast (budgeted income statement) for the Houston store showing the breakdown of fixed and variable expenses in columns two through four. The last column shows the actual results.

T&P Fashions - Houston Store
		Breakdown of Expenses (Forecast)
	Forecast	Fixed	Variable	Actual
Revenues	$1,400,000			$1,260,000
Cost of Sales	790,000		790,000	760,000
Gross Profit	$610,000			$500,000
Management	182,000	154,700	27,300	182,000
Shop assistants	258,000	154,800	103,200	262,000
Rent	23,200	18,560	4,640	22,000
Utilities	34,800	34,800		31,000
Misc. expenses	24,500	12,250	12,250	29,000
Total expenses	$522,500			$526,000
Net income	$87,500			$(26,000)
	=========			=========

Additional Information

Variable expenses are based on revenues and we assume that the percentage remains constant for flexible budgeting purposes.

Fixed costs are all within the relevant range.

Other expenses are all specific to this store. Headquarters pay for marketing and corporate overhead expenses.

Answer 1

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Forecast	Forecast	Fixed	Variable	Actual	Flexible	Working
Revenues	$               1,400,000			$           1,260,000	$       1,260,000
Cost of Sales	$                  790,000		$   790,000	$             760,000	$           711,000	790000/1400000*1260000
Gross Profit	$                  610,000			$             500,000	$           549,000	1260000-711000
Management	$                  182,000	$     154,700	$     27,300	$             182,000	$           179,270	(27300/1400000*1260000)+154700
Shop assistants	$                  258,000	$     154,800	$   103,200	$             262,000	$           247,680	(103200/1400000*1260000)+154800
Rent	$                    23,200	$      18,560	$       4,640	$               22,000	$             22,736	(4640/1400000*1260000)+18560
Utilities	$                    34,800	$      34,800		$               31,000	$             34,800
Misc. expenses	$                    24,500	$      12,250	$     12,250	$               29,000	$             23,275	(12250/1400000*1260000)+12250
Total expenses	$                  522,500			$             526,000	$        507,761
Net income	$                    87,500			$              -26,000	$         41,239
Forecast	Actual
Revenues	$               1,260,000
Cost of Sales	$                  760,000
Gross Profit	$                  500,000
Management	$                  182,000
Shop assistants	$                  262,000
Rent	$                    22,000
Utilities	$                    31,000
Misc. expenses	$                    29,000
Marketing Expense	$                    63,000
Total expenses	$                  589,000
Net income	$                   -89,000
Marketing Expense will increase loss to $89000.