Cases Case 12-1: Domingo Cigars To generate needed foreign exchange, the Cuban government entered into a joint venture with Domingo Cigars of Spain. The joint venture manufactures Domingo Cigars in Cuba using Cuban tobacco and employees. Domingo and the Cuban government split all profits evenly. The contract calls for all financial transactions, including employee salaries, to be in U.S. dollars. Spanish managers came to Cuba and opened a cigar factory. All cigars are handmade. Domingo hires the best Cuban cigar makers, who formerly worked for the Cuban government making cigars. The average cigar roller makes $2.50 per hour in a government factory. Domingo decides to set the effective wage rate at $3.00 per hour to attract the best employees, but will pay them piece rates. Domingo makes three types of cigars: panatellas, coronas, and churchills. All three use the same type of tobacco, but in varying amounts. Among the many management practices installed by Domingo are an employee incentive system and a standard cost system. Because the time to roll each type of cigar varies, employees are paid different amounts for each cigar type. The following standards are established for production. Panatella Corona Churchill Labor time (minutes) 3 4 6 Grams of tobacco per cigar 6 10 20 Effective labor rate (per hour) $3.00 $3.00 $3.00 Tobacco price (per gram) $0.20 $0.20 $0.20 Standard Costs: Direct Labor and Materials 561 Each cigar roller selects an outer wrapper and inner leaves. These are cut and hand-rolled to the desired tightness, size, and weight. Then, an outer leaf is rolled on. The cigar is trimmed and placed in a wooden press to provide a symmetric shape. Employees are paid purely on a piece rate for good cigars produced. Inspectors discard defective cigars and employees are not paid for these cigars. Employees are assigned each day to one of three rolling rooms: panatella, corona, or churchill. Each room is stocked with tobacco leaves. Each roller selects a batch of outer leaves and inner leaves to use from the common tobacco stocks in the room. Sometimes rollers in the same room will share a tobacco pile and will often hand each other leftover pieces if they need some additional filler. At the start of the day, each room is stocked with a preweighed amount of tobacco. At the end of the day, any unused tobacco is weighed and returned to storage. Thus, management tracks the amount of tobacco used in each room each day. Cigars not meeting quality standards are sold to a bulk buyer. However, the roller is not paid for these cigars. Scrap tobacco pieces are sold to jobbers for cigarettes. Domingo buys only the highest-quality tobacco from state communes that grow the tobacco for government-run factories or Domingo. Since Domingo pays more than the government, the com- munes willingly sell their best tobacco to Domingo. The following table summarizes production for the month of March. Cigars produced Actual labor hours Actual tobacco used (grams) Panatella Corona Churchill 115,000 125,000 60,000 4,900 7,000 5,600 740,000 1,360,000 1,400,000 Domingo purchased 3.5 million grams of tobacco for $805,000. Required: a. The piece rate for each cigar type is based on the standard labor minutes for each cigar and a $3.00 per hour wage rate. Calculate the piece rate per cigar paid for panatellas, coronas, and churchills. b. Calculate the tobacco price variance. c. Calculate the tobacco quantity variances for each type of cigar. d. Calculate the labor efficiency variances for each type of cigar. e. Analyze the quantity and labor efficiency variances calculated in parts (c) and (d). What managerial implications do you draw from these variances? f. What suggested changes would you recommend to Domingo Cigars's management? Be specific.