Mountain Spring manufactures and sells varieties of sports drink (berry, lemon and orange) in bulk to upmarket. Budgeted and actual results for 2020 are as follows:

When preparing its budget for 2020, the company assumed that there would be a global market for 22,000,000 boxes of sports drinks and that Mountain Springs product would have a 11.409% share of this market.

However, a recent debate on sports drinks argues that while traditional sports drinks are designed to provide athletes with the right balance of carbohydrates, fluids and electrolytes during exercise, they do more harm than good, if youre just quenching a thirst because sports drinks contain high level of sugar. As a result, during 2020 both Mountain Spring and its competitors were adversely affected by diminishing consumer in sport drink products. The actual total market size was only 20,000,000 boxes.

The Sales director of Mountain Spring recently explained how they attempted to respond to the difficulties which it faced in 2020: First, we reduced our selling price for all products; this was a modest price reduction in comparison with those of our smaller competitors. Second, as a pilot project, we introduce natural ingredients such as natural sweetener to add value to our lemon sports drink. In doing so, we try to increase consumer confidence in the health of our product. Finally, to promote our new design lemon sports drink, we run several marketing campaigns as demonstrating the benefits of sports drinks, in particular, the health of our lemon sports drink (with all-natural ingredients) to the sport players.

Required:

1. Complete the flexible budget (of lemon flavour and all products combined) and associated variances using the template provided. (Please copy and paste the table with your calculations from Microsoft Excel to your Word File);

2. Complete the reconciliation of variances using the template provided (Calculate the profit variances and reconcile the actual operating profit to the planned operating profit using the template provided. (Please copy and paste the table with your calculations from Microsoft Excel to your Word File);

3. The companys director board is not happy with the net profit generate this year, as the actual net profit is less than the budgeted net profit. You are the consultant of the company and are required to provide a report of variance analysis based on the results you have calculated in Q1 and Q2. In your response, you should:

1. Discuss how the variances may relate to each other?
2. Critically evaluate the performance of Mountain Springs sales in 2019, supporting your answer by reference to the sale volume and sales price variances which you have calculated (For example, what are the favourable and unfavourable variances? What are the drivers of the variances?).
3. What recommendations do you have for future improvement?

Mountain Spring Income Statement Year Ended 30 June 2020 $ sales revenue variable costs contribution margin non-variable costs net operating profit $ $ budget actual 18,680,000 19,079,500 (11,400,000) (11,794,000) 7,280,000 7,285,500 (5,580,000) (5,680,000) 1,700,000 1,605,500 S $ Boxes S per box $ per box S per box 500,000 7.00 (4.50) 2.50 400,000 6.90 (4.40) 2.50 Boxes $ per box S per box S per box 900,000 7.00 (4.00) 3.00 1,100,000 6.90 (4.30) 2.60 Product Breakdown Berry sales volume selling price variable costs contribution margin Lemon sales volume selling price variable costs contribution margin Orange sales volume selling price variable costs contribution margin All Products Combined sales volume market share selling price variable costs contribution margin Boxes S per box $ per box S per box 1,110,000 8.00 (5.00) 3.00 1,105,000 7.90 (4.80) 3.10 Boxes S per box $ per box S per box 2,510,000 11.409% 7.44 (4.54) 2.90 2,605,000 13.025% 7.32 (4.53) 2.80 Mountain Spring manufactures Flexible Budget Year Ended 30 June 2020 variance flexible budget $ (325,000) (11,725,000) sales revenue variable costs contribution margin non-variable costs net operating profit budget 18,680,000 (11,400,000) 7,280,000 (5,580,000) 1,700,000 variance actual 19,079,500 (69,000) (11,794,000) 7,285,500 (5,680,000) (429,500) 1,605,500 total variance 399,500 (394,000) 5,500 (100,000) (94,500) 335,000 2,035,000 (100,000) Boxes $ per box $ per box $ per box 500,000 7.000 (4.500) 2.500 400,000 7.000 (4.500) 2.500 (0.100) 0.100 0.000 400,000 6.900 (4.400) 2.500 (0.100) 0.100 0.000 Boxes $ per box $ per box $ per box 900,000 7.000 (4.000) 3.000 1,100,000 6.900 (4.300) 2.600 (4.000) 3.000 (0.300) (0.400) (0.100) (0.300) (0.400) Product Breakdown Berry sales volume selling price variable costs contribution margin Lemon sales volume selling price variable costs contribution margin Orange sales volume selling price variable costs contribution margin All Products Combined sales volume market share selling price variable costs contribution margin (5,000) Boxes S per box S per box S per box 1,110,000 8.000 (5.000) 3.000 1,105,000 8.000 (5.000) 3.000 (0.100) 0.200 0.100 1,105,000 7.900 (4.800) 3.100 (0.100) 0.200 0.100 Boxes 1.616% 13.025% $ per box $ per box Sper box 2,510,000 11.409% 7.442 (4.542) 2.900 2,605,000 13.025% 7.324 (4.527) 2.797 (0.118) 0.014 (0.104) 0.023 2.923 (0.126) Mountain Spring manufactures Profit Variance Analysis Year Ended 30 June 2020 $ $ $ 1,700,000 a Planned net operating profit market size variance market share variance product mix variance volume variance price variance variable cost variance non-variable cost variance price/cost variance Total variance rounding error Actual net operating profit a (94,500) 1,605,500