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	1,500,000		3,000,000			1,500,000
COGS	(1,000,000)		(1,450,000)			(450,000)
Gross Profit	500,000	0	1,550,000			1,050,000
SG&AExpenses
Commisions	75,000		150,000			75,000
Rent Expense	85,000		90,000			5,000
Salaries Expense	100,000		110,000			10,000
Marketing Expense	10,000		10,000			0
Total SG&A Expenses	270,000		360,000			90,000
Operating Income	230,000	0	1,190,000			960,000
Income Tax Expense	57,500		297,500			0
Net Income	172,500	0	892,500			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).