Section V: Memo to Management

The management of the Hampshire Company is very interested in measuring performance. They would like you to recommend a strategy to increase business performance. They are not sure whether they should focus on product differentiation or cost leadership. Research additional performance 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 include the outcome of your previous quantitative analysis and research performed related to cost-volume-profit (CVP), variable and absorption costing, just-in-time (JIT), standard costs, variances, and benchmarking. You will want to review key points and make recommendations based on your current research and prior analysis completed and research performed.

Your two- to three-page memo to management must be submitted as a Word document and must include your responses to Parts A through C of Section V see below as outlined in the Final Project Guidelines and Rubric document.

V. Memo to Management Your memo to management should serve as a

summary of your quantitative analysis, reviewing the key points and recommendations that you feel management should be aware of.

A. Describe the overall findings of your analysis, including key elements that management should be aware of.

B. Make a recommendation to management based on your cost accounting analysis that will enhance business planning.

C. Recommend a performance tool to management based on your cost accounting analysis that will improve business operations.

See info below:

Requirement 1
	Units	Price	Totals	Per Unit
Sales	60,000	$12.50	$750,000
Variable Costs:
Direct Materials	60,000	$3.00	$180,000
Direct Labor	60,000	$1.50	$90,000
Variable Manufacturing Overhead	60,000	$0.40	$24,000
Variable Selling Overhead	60,000	$1.10	$66,000
Total Variable Costs:	60,000	$6.00	$360,000	6.00
Contribution Margin	60,000		$390,000	6.50
Fixed Costs:			$
Fixed Manufacturing Overhead			$216,000.00
Fixed Adminisration Cost			$79,525.00
Total Fixed Costs:	60,000		$295,525.00	4.93
Net Income Before Tax			$94,475.00
Requirement 2
Contribution Margin per Unit in Dollars = Selling Price Variable Costs
Selling Price		Variable Costs	Contribution Margin per Unit
$12.50		$6.00	$6.50
Contribution Margin Ratio = Contribution Margin/Selling Price
Contribution Margin		Selling Price	Contribution Margin Ratio
$6.50		$12.50	52%
Requirement 3
Break-Even Point = Fixed Costs / Contribution Margin
Fixed Costs		Contribution Margin	Break-Even Point in Units (Rounded)
$295,525		$6.50	45,465
Break-Even Point in Units X Selling Price per Unit = Break-Even Point Sales
Break-Even Point in Units		Selling Price per Unit	Break-Even Point in Sales (Rounded)
45,465		$12.50	$568,317
Requirement 4A
Margin of Safety in Units = Current Unit Sales Break-Even Point in Unit Sales
Current Unit Sales		Break-Even Point in Sales	Margin of Safety in Units
60,000		45,465	14,535
Requirement 4B
Margin of Safety in Dollars = Current Sales in Dollars Break-Even Point Sales in Dollars
Current Sales in Dollars		Break-Even Point in Dollars	Margin of Safety in Dollars
$750,000		$568,317	$181,683
Requirement 4C
Margin of Safety as a Percentage = Margin of Sales in Units / Current Unit Sales
Margin of Safety in Units		Current Unit Sales	Margin of Safety Percentage
60,000		45,465	24.22%
Requirement 5
Degree of Operating Leverage = Contribution Margin / Operating Income
Contribution Margin		Operating Income	Operating Leverage
$390,000.00		$94,475.00	4.1281
Requirement 6
	Units	$ Per Unit	Totals
Sales	60,000	$12.50	$750,000
Variable Costs	60,000	$6.00	$360,000.00
Fixed Costs		$4.93	$295,525.00
Net Income			$94,475.00
Operating Leverage		Times % Increase	Increase would be XX%
4.1281		0.2	0.825615242
Prior Income	$94,475.00	From Part 1
Increase	$18,895.00	Prior Income X XX% Above
Total	$113,370.00
Below are calculations to prove that the percentage increase is correct based on the operating leverage calculated in step 5:
72000	Total Units with 20% Increase
$900,000.00	Sales
$432,000.00	Variable Costs with 20% Increase
$468,000.00	New Contribution Margin
4.128076211	Operating Leverage
X
$113,370.00	Increased NI
$468,000.00	New Contibution Margin
Requirement 7
Targeted Income=150,000
Targeted Income = (Fixed Costs + Target Income) / Contribution Margin
Fixed Costs + Target Income		Divided by Contribution Margin	# of Units (Rounded)
Fixed Costs	$295,525	$6.50	45,465
Target Income	$150,000	$6.50	23077
Total	$445,525	$	68,542
		# of Units Above X $ Per Unit
Proof	Revenue	XX,XXX X $XX.XX	$856,779
	Variable Costs	XX,XXX X $X.XX	$411,254
	Contribution Margin		$445,525
	Fixed Costs		$295,525
	Net Income		$150,000
Requirement 8
Sales Mix
	Current	Specialty	Total
Expected Sales Units	60,000	5,000	65,000
Revenue = Sales X Price	$750,000	$55,000	805,000
Variable Costs X Units	$360,000	#REF!	#REF!
Contribution Margin	$390,000	#REF!	#REF!
Fixed Costs	$295,525	$15,000	310,525
Operating Income			#REF!
Prior Net Income From Requirement 1			$94,475.00
Additional Operating Income	(Operating Income Above Less Prior Income)		#REF!
Requirement 1
Hampshire Company
Variable Costing Income Statement
	Units	$
Sales	60,000	$12.50				$750,000.00
Variable Cost of Goods Sold:
Beginning Inventory	0				$0
Direct Materials	80,000	$3.00			$240,000
Direct Labor	80,000	$1.50			$120,000
Manufacturing Overhead	80,000	$0.40			$32,000
Total Variable Costs		$4.90			$392,000.00
Cost of Good Available for Sale					$392,000.00
Deduct Ending Inventory	20,000	$4.90			$98,000.00
Variable Costs of Goods Sold						$294,000.00
Variable Selling Costs	60,000	$1.10			$	$66,000.00
Contribution Margin						$390,000.00
Fixed Costs:
Fixed Manufacturing Costs						$216,000
Fixed Administrative Costs						$79,525
Operating Income						$94,475.00
Requirement 2
Hampshire Company
Absorption Costing Income Statement
	Units	$
Sales	60,000	$12.50				$750,000.00
Variable Cost of Goods Sold:
Beginning Inventory	0				$0.00
Direct Materials	80,000	$3.00			$240,000.00
Direct Labor	80,000	$1.50			$120,000.00
Manufacturing Overhead	80,000	$0.40			$32,000.00
Total Variable Costs					$392,000.00
Allocated Fixed Manufacturing Costs	80,000	$0.00			$0.00
Cost of Good Available for Sale					$392,000.00
Deduct Ending Inventory	20,000	$4.90			$98,000.00
Costs of Goods Sold						$294,000.00
Gross Margin						$456,000.00
Fixed Costs:
Variable Selling Costs	60,000	$1.10				$66,000
Fixed Administrative Costs						$79,525
Operating Income						$310,475.00
Requirement 1
Price Variances:
(Actual Price Standard Price) X Actual Quantity
	Actual	Standard	Actual Quantity	Variance	Favorable or Unfavorable
Cloth	$1.25	$1.15	128,000	12800.00	U
Handle Assembly	$0.99	$1.05	80,808	-4848.48	F
Labor Price Variance	$7.62	$7.50	15,748	1889.76	U
Requirement 2
Efficiency Variances:
(Actual Quantity of Input Used Standard Quantity of Input Allowed for Actual Output) X Budgeted Price of Input
	Actual	Standard	Standard Price	Variance	Favorable or Unfavorable
Cloth	128,000	120,000	$1.15	9200.00	U
(1.5 Yards per Unit)
Handle Assembly	80,808	80,000	$1.05	848.40	U
(1 per Unit)
Labor	15,748	16,000	$7.50	-1890.00	F
(.20 per Unit)
Cost Information From Instructions
	Stick	Collapsible	Quantity of Cost Allocation Base
Units Sold	60,000	3,000	63,000
Selling Price	$12.50	$14.00	27
Direct Material Cost Per Unit	$3.00	$3.10	6
Direct Labor Cost Per Hour	$7.50	$8.00	16
Variable MO	$0.40	$0.40	1
Variable Selling Costs	$1.10	$1.10	2
Labor Hours Per Unit	0.2	0.2	0
Sales Orders	120	1	121
Purchase Orders	50	3	53
Production Runs	45	6	51
Material Moves	86	10	96
Machine Setups	130	6	136
Machine Hours	525	32	557
Inspections	200	10	210
Shipments	60	3	63
Activity Information from Instructions
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
Requirement 1
Activity	Total Costs	Quantity of Cost Allocation Base	Overhead Allocation Rate	Stick	Collapsible	Stick	Collapsible
Order Processing	$35,000	121	$289.26	120	1	34,711	$289.26
Purchasing	$36,000	53	$679.25	50	3	33,962	$2,037.74
Material Handing	$28,000	96	$291.67	86	10	25,083	$2,916.67
Machine Setup	$14,000	136	$102.94	130	6	13,382	$617.65
Production	$99,000	51	$1,941.18	45	6	87,353	$11,647.06
Assembly	$80,000	557	$143.63	525	32	75,404	$4,596.05
Inspecting	$11,000	210	$52.38	200	10	10,476	$523.81
Shipping	$7,500	63	$119.05	60	3	7,143	$357.14
Totals:		1,287	$3,619.34			287,515	$22,985.37
Requirement 2
Traditional Costing
	Stick Umbrella	Collapsible Umbrella	Total
Revenues	$750,000	$42,000	$792,000
Direct Materials	$180,000	$9,300	$189,300
Direct Labor	$90,000	$4,800	$94,800
Variable Overhead	$24,000	$1,200	$25,200
Variable Selling Costs	$66,000	$3,300	$69,300
Allocated Fixed Overhead	$292,662	$17,838	$310,500
Total Costs	$652,662	$36,438	$689,100
Operating Income	$97,338	$5,562	$102,900
Operating Income %	12.98%	13.24%	12.99%
Per Unit Operating Income	$1.62	$1.85	$1.63
Requirement 3
Activity-Based Costing
	Stick Umbrella	Collapsible Umbrella	Total
Revenues	$750,000	$42,000	$792,000
Direct Materials	$180,000	$9,300	$189,300
Direct Labor	$90,000	$4,800	$94,800
Variable Overhead	$24,000	$1,200	$25,200
Variable Selling Costs	$66,000	$3,300	$69,300
Order Processing Costs	$34,711	$289	$35,000
Purchasing Costs	$33,962	$2,038	$36,000
Material Handing Costs	$25,083	$2,917	$28,000
Machine Setup Costs	$13,382	$618	$14,000
Production Costs	$87,353	$11,647	$99,000
Assembly Costs	$75,404	$4,596	$80,000
Inspecting Costs	$10,476	$524	$11,000
Shipping Costs	$7,143	$357	$7,500
Total Costs	$647,515	$41,585	$689,100
Operating Income	$102,485	$415	$102,900
Operating Income %	14%	1%	13%
Per Unit Operating Income	$1.71	$0.14	$1.63
Requirement 4
Costs per Unit	Stick Umbrella	Collapsible Umbrella
Traditional	$1.62	$1.85
ABC	$1.71	$0.14
Difference	-$0.09	$1.72