One & Only Bridal Boutique has prepared the the following static budget and began comparing the status budget to the actual results but needs your help to complete the analysis. First, need to prepare the flexible budget based on the number of units actually produced. The variable costs are highlighted in blue in the static budget and further information can be found below and by interpreting the formula. After preparing the flexible budget, the flexible and static budget variances will be automatically calculated. You need to determine whether or not the variance was favorable or unfavorable and come up with a potential explanation as to why (i.e. higher cost, more units sold). Do not spend more than an hour on this exercise. The potential explanation section does not need to be more than one sentence. Finally, as a result of your analysis provide one recommendation to O&O.
Selling Price per unit = $1,500
COGS per unit = $1,000
Commissions are 5% of Sales
Income tax expense is 25% of Operating Income
| Static Budget | Flexible Budget | Actual Results | Flexible Budget Variance | Favorable Or Unfavorable | Static Budget Variance | Favorable Or Unfavorable | Potential Explanation |
Sales | | | | | | | | |
COGS | | | | | | | | |
Gross Profit | | 0 | | | | | | |
SG&AExpenses | | | | | | | | |
Commisions | | | | | | | | |
Rent Expense | | | | | | | | |
Salaries Expense | | | | | | | | |
Marketing Expense | | | | | | | | |
Total SG&A Expenses | | | | | | | | |
Operating Income | | 0 | | | | | | |
Income Tax Expense | | | | | | | | |
Net Income | | | | | | 0 | | |
| | | | | | | | |
Provide a recommendation to O&O: |
Lily & Lace is contemplating purchasing a new sewing machine. The new machine is expected to be more efficient (less time will be spent setting up the machine). The machine will cost $2,500, and have an estimated 7-year life with a zero salvage value. The estimated annual operating results from the new production system are as follows:
Incremental revenue | - | 5000 |
Incremental expenses | | |
Expenses other than depreciation | 1800 | |
Depreciation (straight-line) | 357 | 2157 |
Incremental net incom | | 2843 |
All revenue and expenses other than depreciation will be received and paid in cash. Show work.
(1) Net annual cash flow
(2) Payback Period
(3) Accounting Rate of Return
(4) Net present value, discounted at an annual rate of 6% (use either Excel or the present value tables)
(5) Do you recommend Lily & Lace to purchase a new sewing machine? Why or why not? (Your answer should use your calculation above to support. It does not need to be more than one or two sentences).