Case 20-3 Cotter Company, Inc.

In: Business and Management

Submitted By Bgerwick
Words 636
Pages 3
Case 20-3 Cotter Company, Inc.
Acctg 835
Advanced Managerial Accounting
Powercat Consulting Group
Group 2
Blake Gerwick, Jing Yu, Jake Norby
March 4, 2013

General Overview: During preparation of the annual budget, the management of Cotter Company has realized that the company has seasonal sales fluctuations. Currently the costs of operation include prime costs (which are labor and material costs that vary with quantity of production), production overhead costs (which include both fixed and variable elements), and selling and general expenses costs. Of the total production overhead budget it is estimated that the variable costs are equal to 25% of the prime costs. Projections for the month of January showed that the company should produce a profit of $20,000. However sales goals were not met and production was also cut back. Due to these two factors the company experienced a loss of $7,000 for January which perplexed the company president, Sam Cotter. Our firm has been contracted to analyze the situation so that Cotter Company has a better understanding of how their production and sales levels affect their bottom line.

Questions and Solutions: 1. The first determining factor in the loss for January is that the company missed sales projections by $60,000 which is 30% below planned sales volume. Secondly, the company experienced a $3,500 unfavorable prime cost variance along with a $12,500 unfavorable volume variance. The volume variance can be attributed to the fact that production volume was cut back. The prime cost variance could be due to either inefficient labor and/or material usage or spending more than planned for materials.

2. From our calculations, Cotter should expect to earn exactly zero profit it the monthly volume level is 155,556 units. That is with the assumptions that the selling price is $1 per unit and that there are no…...

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