Question

In: Accounting

The Mystic River Flyfishing Company designs, manufactures and retails fly-rods to fishing enthusiasts around the world via its website.

 

The Mystic River Flyfishing Company designs, manufactures and retails fly-rods to fishing enthusiasts around the world via its website. Mystic River is known for its advanced materials, innovative designs and lifetime warranties against breakage. Mystic River produces three fly-rod designs that are targeted to fly fishers of different abilities: beginning (Smooth 100), intermediate (Crisp 200) and advanced (Rapid 300). The company prepared a fixed/master budget for the year 2018 shown below, assuming production and sales of 36,000 units. This level of production represents 80% of the company’s total production capacity.

Sales

 

$1,800,000

Cost of goods sold:

   

  Direct materials

$648,000

 

  Direct Labor

360,000

 

  Indirect materials (variable)

18,000

 

  Indirect labor (variable)

25,200

 

  Depreciation

216,000

 

  Salaries

108,000

 

  Utilities (80% fixed)

64,800

 

  Maintenance (40% variable)

39,600

1,479,600

Gross profit

 

$320,400

Operating expenses:

   

  Commissions

$54,000

 

  Advertising (fixed)

72,000

 

  Wages (variable)

18,000

 

  Rent

36,000

 

  Total operating expenses

 

180,000

Income from operations

 

$140,400

However, the senior manager of the company found the company’s profitability was not as good as expected. At the end of the year 2018, the actual sales volume was 38,400 units, higher than budgeted of 36,000 units, but the income from operations was much lower than budgeted at the beginning of the year. The company’s actual activity for the year follows.

Sales (38,400 units)

 

$1,854,000

Cost of goods sold

   

  Direct materials

$676,800

 

  Direct labor

385,200

 

  Indirect materials (variable)

23,760

 

  Indirect labor (variable)

27,000

 

  Depreciation

216,000

 

  Salaries

110,400

 

  Utilities (85% fixed)

76,800

 

  Maintenance (40% variable)

38,400

1,554,360

Gross profit

 

$299,640

Operating expenses:

   

  Commissions

$66,000

 

  Advertising (fixed)

79,200

 

  Wages (variable)

24,000

 

  Rent

42,000

 

Total operating expenses

 

211,200

Income from operations

 

$88,440

Required:

  1. With higher than expected number of units sold, income from operations dropped dramatically, the senior manager of The Mystic River Flyfishing Company wants to find out what went wrong. He asks you, an experienced senior management accountant to prepare a flexible budget performance report that shows variable costs per unit, total fixed costs using the contribution margin format. (11 marks)
  2. Based on your answer in (1) above, please explain which top three reasons are most likely to reduce the income form operation. (3 marks)

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