QUESTION A: Revenue variances - RU Fitness Company

"As gyms and fitness centers reopen, they must follow strict guidelines for sanitation, social distancing, occupancy, and even more. Even if these facilities are considered safe by most standards, their patrons still may not feel comfortable, especially older adults, and others who are at a higher risk for COVID....So how do you maintain your fitness when you can't follow your usual exercise routine?

One solution is at-home workouts..[1]"Harvard Business Review

The RU Fitness Company (RU) makes rowing machines for home gyms. Rowing machines simulate the workout one would get if rowing a boat. It has been said that a workout on a rowing machine can use up to 86 percent of body muscle.

Due to the COVID pandemic, RU saw a rise in demand for their rowing machines as local gyms closed or patrons were not comfortable working out at a gym. Diego Madruga, owner and CEO of the company expects the current level of demand will hold steady for the next five years as he learns more people are opting to work out at home.

RU manufactures their equipment at its plant in Langley, BC. It manufactures three different models. The Hydro-1, which is a more budget based machine. It gives its owner a similar workout as its higher end equipment with the advantage of fitting into a smaller space. The AiRRow uses a flywheel to produce resistance resulting in a more realistic experience of being on open water. And the Magno-2 offers a variety of programs that can be built into the workout routine.

Current situation:

Diego relies on his sales manager, Anh Tran, to motivate her team of 10 sales staff to at least meet the annual budget. On top of a base salary and a 5 percent of revenue commission, each team member also receives an annual bonus when actual sales in units beat budgeted sales by at least 8%. Based on market analysis and keeping up to date on trends in rowing machine styles, Anh set the following budgets at the beginning of the year. (see next page)

B U D G E T

Model

Selling price

Variable cost per unit

Sales Volume in units

Hydro-1

$650

$280

5,775

AiRRow

1,095

845

2,310

Magno-2

1,695

1,185

3,465

Total

11,550

The total sales figure represents 11% of the budgeted rowing machine market in the area where RU sells its rowing equipment. Anh is fairly confident that the mix of each rowing machine's sales to total is stable.

It is year end and Corey, the cost accountant, has just printed off the raw data for the year and provided Diego and Anh with the following results:

A C T U A L

Model

Selling price

Variable cost per unit

Sales Volume in units

Hydro-1

$665

$275

5,355

AiRRow

1,117

845

3,465

Magno-2

1,790

1,250

3,780

Total

12,600

Anh is thrilled to see that her sales team has yet again beat the budget by selling a total of 12,600 rowing machines over the past 12 months. Diego has asked Corey to prepare the year-end bonuses to the sales team. He is also planning a company year end event which is an evening online dinner party (via Uber Eats) to celebrate the achievement.

Corey meets with you, the controller, to review the results and give your permission to go ahead with bonuses and the dinner party plans.

(required on next page)

Required

1.Calculate the sales volume variance for all three rowing machine models individually and in total (show calculations).

Hydro-1_______________

AiRRow_______________

Magno-2 _______________

TOTAL_______________

2.Calculate the sales mix variance for all three rowing machines individually and in total.

Hydro-1_______________

AiRRow_______________

Magno-2_______________

TOTAL_______________

3.

3.Calculate the sales quantity variance for all three products individually and in total.

Hydro-1_______________

AiRRow_______________

Magno-2_______________

TOTAL_______________

When answering the following qualitative questions, remember to use figures from your analysis.

4.By now, you should have discovered that the sales volume variance is favourable. Explain how the sales mix and sales quantity variances provide further insight into the sales volume variance. (HINT: At a level of 12,600 rowing machines sold, RU should have had higher profits.)

5.Based on your analysis from part 4 and assuming sales staff wanted to maximize sales commissions, discuss the effectiveness of the method in which sales commissions are granted.

6.As controller, you ask Diego to provide you with year-end actual market volume figures. He tells you that the actual market size for rowing machines for the year was 120,000 rowing machines. Using this information and appropriate information from the question, calculate the following:

a.The market size variance

b.The market share variance

7.What do the market variances tell you about the success of the sales department? Should the sales bonuses be approved? Why or why not? Should the bonus policy be reviewed? If so, what should be considered?

[1] "Home Gym Advantage", Harvard Health Publishing, https://www.health.harvard.edu/staying-healthy/home-gym-advantage, Accessed 14/04/2021