d.
There appears to be both good news and bad news. On the one hand, revenue has
increased dramatically, by 20%. On the other hand, the mix of sales has worsened. The
net effect of these two factors is positive. Tom must seriously consider whether his
business strategy is to sell more of high margin products (the deluxe bikes) or more of the
lower margin product (the standard bike). The budget indicates the former but actual
results indicate the latter. Because actual results likely reflect customer tastes, Tom may
be well advised to revise his plans.
M
INI
-C
ASES
8.69
a.
The following table shows Jason’s expected profit using the information contained in the
master budget:
Master Budget
(Amazing Grace Putter)
Putters sales
5,000
Revenue
5,000
$280
$1,400,000
Variable costs
Material costs:
Aluminum & weights
(for putter head)
5,000
$60
$300,000
Shaft (steel)
5,000
$8
40,000
Grip
5,000
$10
50,000
Labor costs
5,000
$60
300,000
Balakrishnan, Sivaramakrishnan, & Sprinkle – 2e
FOR INSTRUCTOR USE ONLY
8-49

Contribution margin
$710,000
Fixed costs
Given
250,000
Profit
$460,000
Alternatively, we could calculate Jason’s master budget profit using the cost-volume-
profit (CVP) equation.
We have:
Profit before taxes = unit contribution margin × sales in units – fixed costs.
The budgeted contribution margin on each Amazing Grace putter = $280 – $60 – $8 –
$10 – $60 = $142. Additionally, Jason’s fixed costs are expected to be $250,000. Finally,
Jason’s master budget calls for sales of 5,000 putters.
Thus, we have: ($142 × 5,000) – $250,000 =
$460,000 in master budget profit.
b.
Using the data provided, the following table presents Jason’s actual profit from his
Amazing Grace putter:
Actual Profit
(Amazing Grace Putter)
Putters sales
5,600
Revenue
5,600
$245
$1,372,000
Variable costs
Material costs:
Aluminum & weights
(for putter head)
5,600
$42
$235,200
Shaft (steel)
5,600
$8
44,800
Grip
5,600
$12
67,200
Labor costs
5,600
$50
280,000
Contribution margin
$744,800
Fixed costs
300,000
Profit
$444,800
Thus, Jason’s total profit variance = $444,800 – $460,000 = ($15,200) or $15,200 U.
That is, Jason’s actual profit is $15,200 lower than his master budget profit.
c.
Using the assumptions contained in the master budget and adjusting for the actual sales
level of 5,600 putters, we have:
Flexible Budget Profit
(Amazing Grace Putter)
Balakrishnan, Sivaramakrishnan, & Sprinkle – 2e
FOR INSTRUCTOR USE ONLY
8-50

Putters sales
5,600
Revenue
5,600
$280
$1,568,000
Variable costs
Material costs:
Aluminum & weights
(for putter head)
5,600
$60
$336,000
Shaft (steel)
5,600
$8
44,800
Grip
5,600
$10
56,000
Labor costs
5,600
$60
336,000
Contribution margin
$795,200
Fixed costs
250,000
Profit
$545,200
Alternatively, we could use Jason’s CVP model to answer this question. Using the
equation we developed in part [a] and plugging in an actual sales volume of 5,600 putters
yields:
Flexible budget profit
= ($142 × 5,600) – $250,000 =
$545,200.
d.
To answer this question, we need to look at the sales volume variance and the sales price
variance. After all, the decision to reduce the sales price affects the quantity of putters
sold (sales volume) and the price at which the putters are sold (sales price). The net effect
of these two variances gives us the profit impact associated with a change in the sales
price.