Katharine Johnson is the owner of Groovy Bikes, a company that produces high quality cross-country bicycles. Groovy Bikes participates in a supply chain that consists of suppliers, manufacturers, distributors, and elite bicycle shops. For several years Groovy Bikes has purchased titanium from suppliers in the supply chain. Groovy Bikes uses titanium for the bicycle frames because it is stronger and lighter than other metals and therefore increases the quality of the bicycle. Earlier this year, Groovy Bikes hired Michael Monachino, a recent graduate from State University, as purchasing manager. Michael believed that he could reduce costs if he purchased titanium from an online marketplace at a lower price. (Click the icon to view the standard and actual information.) Read the requirements. Data table Requirement 1. Compute the direct materials price and efficiency variances. Let's begin by calculating the cost for the actual input at the budgeted price. Direct materials (purchases) Direct materials (usage) Actual input X Budgeted price = Cost X Next determine the formula and calculate the cost for the flexible budget. Direct materials = Groovy Bikes established the following standards based upon the company's experience with their previous suppliers. The standards are as follows: Cost of titanium Titanium used per bicycle $18 per pound 8 lbs. Actual results for the first month using the online supplier of titanium are as follows: Bicycles produced = Flexible budget cost Titanium purchased = Titanium used in production Now compute the price and efficiency variances for direct materials. Label each variance as favorable (F) or unfavorable (U). Direct materials Price variances Efficiency variances 300 4,400 lb. for $66,000 3,900 lb. Print Done Requirement 2. What factors can explain the variances identified in requirement 1? Could any other variances be affected? The is due to the difference between the standard price based on the previous suppliers and the actual price paid through the online marketplace. The inexperienced workers, lower quality product, and machine malfunctions. The variance could be affected if the lower quality titanium caused the workers to use more time. Requirement 3. Was switching suppliers a good idea for Groovy Bikes? Explain why or why not. Switching suppliers a good idea. The in the cost of titanuim was outweighed by the variance pounds were used. Groovy Bikes could expect the remaining material usage. In addition, the recognize the total impact of the lower quality titanium because only pounds to result in an additional variance. could be due to several factors including Requirement 4. Should Michael Monachino's performance evaluation be based solely on price variances? Should the production manager's evaluation be based solely on efficiency variances? Why is it important for Katharine Johnson to understand the causes of a variance before she evaluates performance? The purchasing manager's performance evaluation performance evaluation be based solely on the price variance. The short-run be based solely on the efficiency variances. In this case, the production manager in purchase costs was more than offset by usage rates. In addition, the production manager's responsible for the purchase of the lower-quality titanium, which led to the efficiency scores. Select the two statements that answer why it is important for Katharine Johnson to understand the causes of a variance before she evaluates performance. It is important for Johnson to understand that all favorable material price variances are "good news", because they are increasing profits. Johnson should understand efficiency variances may arise for only one reason and she needs to know that reason before evaluating performance. Johnson should understand efficiency variances may arise for many different reasons and she needs to know these reasons before evaluating performance. It is important for Johnson to understand that not all favorable material price variances are "good news", because of the negative effects that can arise in the production process from the purchase of inferior inputs. Requirement 5. Other than performance evaluation, what reasons are there for calculating variances? A. To use the variance information to negotiate lower prices with suppliers. B. Variances should be used to help Groovy Bikes understand what led to the current set of financial results, as well as how to perform better in the future. C. Variances are used to demand higher quality materials from suppliers at the same cost that Groovy Bikes pays now. A. Future problems can arise in the supply chain. Monachino may need to go back to the previous suppliers. But Groovy Bikes' relationship with them may have been damaged and they may now be selling all their available titanium to other manufacturers. B. Lower quality bicycles could affect Groovy Bikes' reputation with the distributors, the bike shops and customers, leading to higher warranty claims and customer dissatisfaction, and decreased sales in the future. C. There are no future problems from buying a lower quality of titanium. Groovy Bikes has a good reputation and bike shops and customers will still purchase the bikes. As a result Monachino has increased profits. D. Both A and B