Cleveland Computer Accessory Company (CCAC) distributes keyboard trays to computer stores. The keyboard trays can be attached to the underside of a desk, effectively turning it into a computer table. The keyboard trays are purchased from a manufacturer that attaches CCAC’s private label to the trays. The wholesale selling prices to the computer stores are $120 for the business-grade keyboard tray and $60 for the residential-grade product. The 20x2 budget and actual results are as follows. The budget was adopted in late 20x1 and was based on CCAC’s estimated share of the market for the two types of keyboard trays.
CLEVELAND COMPUTER ACCESSORY COMPANY Income Statement For the Year Ending December 31,20x2 (in thousands) | |||||||
Business Grade | Residential Grade | Total | |||||
Budget | Actual | Budget | Actual | Budget | Actual | Variance | |
Sales in units | 80 | 74 | 120 | 86 | 200 | 160 | 40 |
Revenue | $9,600 | $8,510 | $7,200 | $5,074 | $16,800 | $13,584 | ($3,216) |
Cost of goods sold | 6,400 | 6,068 | 6,000 | 4,300 | 12,400 | 10,368 | 2,032 |
Gross margin | $3,200 | $2,442 | $1,200 | $774 | $4,400 | $3,216 | ($1,184) |
Unallocated costs: | |||||||
Selling | $1,000 | $1,000 | $― | ||||
Advertising | 1,000 | 1,060 | (60) | ||||
Administrative | 400 | 406 | (6) | ||||
Income taxes (45%) | 900 | 338 | 562 | ||||
Total unallocated costs | $3,300 | $2,804 | $496 | ||||
Net income | $1,100 | $412 | ($688) | ||||
During the first quarter of 20x2, management estimated that the total market for these products actually would be 10 percent below the original estimates. In an attempt to prevent unit sales from declining as much as industry projections, management implemented a marketing program. Included in the program were dealer discounts and increased direct advertising. The business grade line was emphasized in this program.
Required:
1. Compute the sales-price and sales-volume variances for each product line. Indicate whether each variance is favorable or unfavorable.
2. Discuss the apparent effect of CCAC’s special marketing program (i.e., dealer discounts and additional advertising) on the 20x2 operating results.
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