SectionI: Cost-Volume-Profit Analysis

The Hampshire Company manufactures umbrellas thatsell for $12.50 each. In 2014, the company made and sold 60,000 umbrellas. Thecompany had fixed manufacturing costs of $216,000. It also had fixed costs foradministration of $79,525. The per-unit costs of each umbrella are as follows:

Direct Materials: $3.00

Direct Labor: $1.50

Variable Manufacturing Overhead: $0.40

Variable Selling Expenses: $1.10

Using theinformation above, perform a cost-volume-profit (CVP) analysis by completing thesteps below. All CVPcalculations should be completed in the Hampshire Company Spreadsheet. Note: TheCVP analysis satisfies Part A of Section I.

1.Compute netincome before tax.

2.Compute theunit contribution margin in dollars and the contribution margin ratio for oneumbrella.

3.Calculatethe break-even point in units and dollars of revenue. Note: This is a required part of the CVP analysis and satisfies Part Cof Section I.

4.Calculatethe margin of safety:

a.In units

b.In salesdollars

c.As apercentage

5.Calculatethe degree of operating leverage.

6.Assumethat sales will increase by 20% in 2015. Calculate the percentage of before-taxincome for this increase. Provide calculations to prove that your percentageincrease is correct based on the operating leverage calculated in step 5.

7.Computethe number of umbrellas that Hampshire is required to sell if it plans to earn $150,000in income before taxes by using the target income formula. Proof your calculation.

8.A companythat specializes in tours in England has offered to purchase 5,000 umbrellas at$11 each from Hampshire. The variable selling costs of these additional unitswill be $1.30 as opposed to $1.10 per unit. Also, this production activity willincur another $15,000 of fixed administrative costs. Should Hampshire agree tosell these additional 5,000 umbrellas to the touring business? Providecalculations to support your decision.

Section II: Inventory Management

The information below represents the beginning andending inventory amounts along with the production and sales for the month inumbrella units.

Beginning Inventory: 0 Umbrellas

Production: 80,000 Umbrellas

Sales: 60,000 Umbrellas

Ending Inventory: 20,000 Umbrellas

Using the information provided above and the costsand sales information provided in Section I, complete the following in the HampshireCompany Spreadsheet in order toassist you in responding to all components of Section II:

Prepare avariable costing income statement.

Preparean absorption costing income statement.

Section III: Benchmarking

The management of the Hampshire Company would liketo implement benchmarking. Standard costs have been established and arepresented below. You will want to complete a variance analysis to includeefficiency and price variances for materials (cloth and handle assemblies) andlabor based on the following data:

Units Produced = 80,000

Units Sold = 60,000

DirectMaterials Purchased and Used

Actual square yards of cloth purchased and used: 128,000

Actual price incurred per yard: $1.25

Actual handles purchased and used: 80,808

Actual price per handle/rib/stretcher assembly:$0.99

DirectManufacturing Labor Used

Actual direct labor hours used: 15,748

Actual price per hour: $7.62

Direct labor costs: $120,000

Standard Rates

Standard labor hours per unit: 0.20

Standard labor price per hour: $7.50

Square yards material per unit: 1.50

Standard price per yard: $1.15

Handle/rib/stretcher assembly per unit: 1

Standard price per handle assembly: $1.05

Companies can usevariance analysis and benchmarking to measure performance within their owncompany and against competitors.This can be done by settingstandards/budgets and comparing a completed variance analysis to results fromprior periods or comparing them to competitors results. Using the informationprovided above, complete the following calculations (steps 1 and 2) in the Hampshire Company Spreadsheet. This will assist you in responding to allcomponents of Section III.

1.Calculateprice variances for material and labor and denote whether they are favorable orunfavorable.

2.Calculateefficiency variances for material and labor and denote whether they arefavorable or unfavorable.

In order to measure performance and make use of thevariance analysis completed, management understands the need to compare resultswith their competitors. Following the steps outlined below, you will researchbenchmarking and propose the most effective approach for your company.

Section IV: Alternative Costing Method

Hampshire hasalways produced stick umbrellas. However, it is considering expanding itsproduction to include collapsible umbrellas. This consideration has beenspurred by Tours Today, a touring company that is interested in providing itscustomers with collapsible umbrellas imprinted with its logo. The management atHampshire is currently working out a deal with the touring company to produce3,000 collapsible umbrellas and believes it can sell those umbrellas for $14.00each. Here are the costs that can be directly traced to this special order:

Direct Materials: $9,300

Direct Labor Hours: 600

Hourly Rate of Direct labor: $8.00

In the traditionalcosting approach, overhead is applied at the rate of $24.60 per labor hour.This expansion in production will add additional overhead costs. The totaloverhead costs (assuming production of the stick and collapsible umbrellas) toinclude the cost pools and cost drivers are provided in Table 2.

Analternative costing method that might benefit Hampshire is the implementationof activity-based costing (ABC). Hampshirewould like to implement an ABC approach to analyze the production of thisspecial order of collapsible umbrellas. The controller has assembled thefollowing information:

	Stick	Collapsible
Units Sold	60,000	3,000
Selling Price	$12.50	$14.00
Direct Material Cost per Unit	$3	$3.10
Direct Labor Cost per Hour	$7.50	$8.00
Variable Manufacturing Overhead	$0.40	$0.40
Variable Selling Costs	$1.10	$1.10
Labor Hours per Unit	0.2	0.2
Sales Orders	120	1
Purchase Orders	50	3
Production Runs	45	6
Material Moves	86	10
Machine Setups	130	6
Machine Hours	525	32
Inspections	200	10
Shipments	60	3

Table 1: Direct Cost Information andActivities

Activity	Activity Cost	Activity Cost Driver
Order Processing	$35,000	Number of Sales Orders
Purchasing	$36,000	Number of Purchase Orders
Material Handing	$28,000	Material Moves
Machine Setup	$14,000	Machine Setups
Production	$99,000	Production Runs
Assembly	$80,000	Machine Hours
Inspecting	$11,000	Number of Inspections
Shipping	$7,500	Number of Shipments

Table 2: Activity Cost Pools and CostDrivers

Anotheralternative to traditional costing and ABC is time-driven activity-basedcosting (TDABC). You will need to determine which of these three methods wouldbe the best approach for the Hampshire Company. The following article mayassist you in your analysis: Time-Driven Activity-Based Costing.

Using theinformation provided above, complete the following in the Hampshire Company Spreadsheetin order to assist you in responding to all components of Section IV:

1. Calculate the allocation rates for eachcost driver using ABC.

2. Use the traditional costing approach tocalculate the total cost and the unit cost of the stick and collapsibleumbrellas.

3. Use ABC to compute the total costs and theunit cost for the stick and collapsible umbrellas.

4. Compute the difference between the productcost per stick and collapsible umbrellas using the unit cost that you computedwith the traditional approach and the one that you computed using ABC.

Section V: Memo to Management

The management of the Hampshire Company is veryinterested in measuring performance. They would like you to recommend astrategy to increase business performance. They are not sure whether theyshould focus on product differentiation or cost leadership. Research additionalperformance tools to include the balanced scorecard. During your research,consider what performance measurements you would use based on the four perspectives.Provide examples.

In your recommendation, you will want to includethe outcome of your previous quantitative analysis and research performedrelated to cost-volume-profit (CVP), variable and absorption costing,just-in-time (JIT), standard costs, variances, and benchmarking. You will wantto review key points and make recommendations based on your current researchand prior analysis completed and research performed.

Your two- to three-page memo to management must besubmitted as a Word.