MBA6100 Case Study #2

Spring 2021 Block 1

Calculations and backup should be completed and submitted in one Excel file. Word documents or other file types will

not be accepted. Use proper Contribution Margin Income Statement formatting (see below). Each question refers to the

same initial data. Treat each question separately. Ignore income taxes. Assume no beginning or ending inventories.

Calculations and backup should be completed and submitted in Excel. Leave any formulas used in the Excel cells (do not

hard code or type in results); this allows for partial credit if possible. Analysis can either be typed into cells in Excel

(formatted to be easily legible) or typed into a text box in Excel. Students are expected to work independently.

Contribution Margin format example:

Note: This case study is based on Material from Chapters 8 & 9. The extra credit is based on Material in Chapter 10. (We

do not specifically cover Chapter 10, so that is why this portion of the case study is Extra Credit.)

Vroom-Vroom manufactures ride-on cars for toddlers and young children. They have a fiscal year of January through

December. When they were preparing their budget, they couldn't decide if a static or flexible budget would be best for

their company - so they did both. It is now March, and their accounting department is catching up on analyzing

variances for both January and February. Vroom-Vroom would like to use this opportunity to determine whether they

would be better off with a static or flexible budget going forward. They want to choose which budget and related

variance analysis provides them the best information for decision-making.

Here is the data that Vroom-Vroom used for their budgets:

Vroom-Vroom estimated sales/production will be between 100,000 and 300,000 cars per month. Their static budget is

based on 200,000 cars sold per month. Assume that all units produced in a month are also sold in that month. Vroom-

Vroom's unit of production/sale is a car (unit/each).

Here are the Actual Results in January and February:

Question 1: Prepare a

static budget

in Excel for Vroom-Vroom based on 200,000 units produced. (32 points)

a) Show the static budget for January in Contribution Margin Income Statement format - be sure to list out each

expense line.

b) Compare January's static budget to January's actual results. Specify which line items are favorable or

unfavorable and how much. Provide potential explanations for each of the variable costs. Note: Saying that an

item was above or below budget is NOT an explanation. You need to include potential (made-up) reasons.

c)

Show the static budget for February in Contribution Margin Income Statement format - be sure to list out each

expense line.

d) Compare February's static budget to February's actual results. Specify which line items are favorable or

unfavorable and how much. Provide potential explanations for each of the variable costs. Note: Saying that an

item was above or below budget is NOT an explanation. You need to include potential (made-up) reasons.

Question 2: Prepare a

flexible budget

in Excel for Vroom-Vroom. (32 points)

a) Show the flexible budget for January in Contribution Margin Income Statement format - be sure to list out each

expense line.

b) Compare January's flexible budget to January's actual results. Specify which line items are favorable or

unfavorable and how much. Provide potential explanations for each of the variable costs. Note: Saying that an

item was above or below budget is NOT an explanation. You need to include potential (made-up) reasons.

c)

Show the flexible budget for February in Contribution Margin Income Statement format - be sure to list out

each expense line.

d) Compare February's flexible budget to February's actual results. Specify which line items are favorable or

unfavorable and how much. Provide potential explanations for each of the variable costs. Note: Saying that an

item was above or below budget is NOT an explanation. You need to include potential (made-up) reasons.

Question 3: Analyze the differences between static and flexible budgets. (34 points)

a) What is the difference between static and flexible budgets in theory?

b) What are the differences between the static and flexible budgets for Vroom-Vroom? What variances are

different and by how much? What does this tell us?

c)

What are the pros and cons for each - static and flexible budgets?

d) Write a letter to Vroom-Vroom's CFO. Explain the results in January and February. Provide your

recommendation for either static or flexible budgets. Provide explanations and backup for your

recommendation. Note: A letter to the CFO should have correct spelling and grammar, and is expected to be

approximately . Thorough explanations with backup are required.

Extra Credit: (6 points)

a) Using the static budget for January in Question 1 (compared to January actual results), calculate the price

variance and volume variance for raw materials.