Sharp makes suits for special occasions. The design has a two-year life cycle. Expected sales volume is 8,000 units; selling price $450 and the profit margin is 45%. You are also given the following information.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Sharp makes suits for special occasions. The design has a two-year life cycle. Expected sales volume is 8,000 units; selling price $450 and the profit margin is 45%. You are also given the following information.
- Direct superior materials cost $100. These can be substituted for an inferior grade which costs 60% less. However 25% of the superior materials cannot be substituted. Sharp’s buying manager has negotiated a 10% discount of the superior material.
- The suits require 40 minutes of direct labor at a cost of $30 per hour. However if the lower grade material is used, the first 1,000 suits will take 40 minutes and the next 7,000 30 minutes.
- Each suit needs two hours of machining at $20 per hour.
- 5% of the output will be checked for quality. Each quality check will cost $40
- 15% of the suits will have to be reworked if the inferior material is used. Each rework will cost $40
- The initial design costs were $400,000
- Sales and marketing will cost $1m over 2 years.
You are required to prepare a MS Excel spreadsheet which:
- Shows profit per unit and target cost per unit
- Calculates the lifetime cost of each unit
- Advises Sharp on the options they have using what if scenarios
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