Question

Nail_It company is a manufacture of a custom engraved hammer. For the year 2021, the weekly budget was as follows.

• Sales revenue $64,000: 2,000 hammers × price $32
• Variable costs:
  • Direct materials $10,000: 2,000 hammers × 1 lbs per hammer × price $5/lb
  • Direct labor $50,000: 2,000 hammers × 5 hour per hammer ×rate $5/hour
  • no variable overhead
• Fixed costs: $3,000
• Profit: $1,000

The actual performance of the week was as follows.

• Sales revenue $70,400: 2,200 hammers × price $32
• Variable costs:
  • Direct materials $13,200: 2,200 hammers × 1 lbs per hammer × price $6/lb
  • Direct labor $46,200: 2,200 hammers × 3 hour per hammer ×rate $7/hour
  • no variable overhead
• Fixed costs: $8,000
• Profit: $8,000

Required:

1) Compute the following variances

a) Sales Volume Variance

b) Sales Price Variance

c) Input Quantity Variance for Materials

d) Input Price Variance for Materials

e) Input Quantity Variance for Labor

f) Input Price Variance for Labor

2) Nail_It company hired an experienced engineer and asked her to re-organize the production process. How could hiring an experienced engineer and their new production process explain the variances? Please comment on individual components of variances, their relations to other variances, and overall impact on profitability.