ing profit reconciliation statement: — | ——— — | — — | | —ee “Thank you for the quote, but I'll be going to Best Instrument Repait. I've he give good service, and their prices are lower than yours.” Unfortunately, Decker had Similar statements many times during the past few months. Ever since Best Instrument Repait had opened ‘across town, Decker and his partners had found themselves having to compete for business more than ever before. To attract repair jobs and avoid layoffs, Decker and his partners hhad lowered prices for minor repairs forthe first time in 10 years. Decker looked at the budgeted versus-actual operating-profit statement on his desk (Exhibit 1). How could he tell what portion of the company’s lost profits was due to the price decreases and how much was related to other factors? Background ‘The Squeaky Hom was a musicalsinstrument repair shop that specialized in the repair and restoration of band and orchestral instruments, The shop was owned and managed by Decker and two partners, who were all well regarded for their exacting repair work and attention to Getail, Professional musicians from all over the country sent their instruments to the Squeaky Horn for minor adjustments or major overhauls. Demanding concert and travel schedules placed great stress on the delicate parts of musical instruments, and professional musicians were careful to keep their instruments in peak condition Service Lines rand mil and sand major.and ue Currently, the Squeaky Horn offered four main services: majo restorations of band instruments such as saxophones and French horns, (MBA ‘03) and Liz Smith (MBA °04), under the supervision of Professor ‘Mark Haskins. 1 was writen asa basis for class discussion rather than to illustrate effective or ineffective handling | of an administrative situation. Copyright © 2003 by the University of Virginia Darden School Foundation, , le, VA. All rights reserved. 7 order copies, send an e-mail to sales@dardenpublishing.com. No part system, used in a spreadsheet, or transmitted in amy ‘may be reproduced, stored in a retrieval smeans electronic, mechanical, photocopying, recording, or otherwise -withou the permission of This case was prepared by Kristy Lilly‘The average rush job took three hours to complete. Operating Plan At the beginning of the current year, Decker’s CPA had prepared the annual operating plan for the Squeaky Horn (Exhibit 1). The Squeaky Horn’s business was small and relatively straightforward, which enabled the CPA to develop the company’s operating budget using specific volume and revenue data for each product line. The following information was used in preparing the annual plan: 1. Based on prior years’ work orders, the shop was expected to perform the following. number of jobs in the coming year: 390 major band repairs, 1,830 minor band repairs, 540 major orchestral repairs, 1,560 minor orchestral repairs, and 50 rush jobs. Average major repairs were quoted at $400 and $300 for band and orchestral jobs, respectively. The average minor band repair took two hours to complete, whereas the average minor orchestral repair took four hours to complete. 2. All three partners drew annual base salaries of $60,000 plus bonuses of 5 percent of sales revenue. 3. The hourly employees were paid $20}an hour for work performed. 4, The salaried employees were paid annual base salaries of $38,000. To the extent that the number of minor orchestral repairs exceeded 1,560, the orchestral repairers were paid a flat rate of $80 per job to complete those repairs. Replacement parts and other supplies were budgeted at $50 for each major job and $10 for each minor job (including rush jobs), based on experience. 6. Approximately 35 percent of the instruments that the Squeaky Horn worked on were shipped to the shop from out of town. ‘The company expected to incur average shipping charges of $30 per package to ship the instruments back to their owners 7, Advertising, depreciation, office rent, and miscellaneous expenses were budgeted as fixed expenses. sin Management Accounting PGP 2014 by Pol Ashutosh Dash, at Management Development Insts -use aly in Management Accounting ns: during the past ye less than planned even though rev el it chang iS profit was $50,745 c star fs a ee ind fully the decrease in profits, Decker sat down 2. i ft ‘ Owing to increased competition, minor band repairs were billed at $30 an how minor orchestral repairs were billed at $28 an hour. 2. Planned versus actual jobs and average hours per job were as follows: Plan Volume Plan Actual Volume Actual, Job Type Nowof Jobs Hrs Job No.of Jobs Hrs./Job Band major repairs 390 7.0 450 7.0 Band minor repairs 1,830 2.0 4,740 3.0 Orchestral major repairs 540 60 510 7.0 Orchestral minor repairs 1,560 4.0 1,650 36 Rush jobs 50. 3.0 55 28 Total 4370 4,405, 3, On average, major repairs and restorations required more replacement parts than in past years. ‘Therefore, replacement-parts expenses for major repairs increased an average of $10 per job for the year. In addition, shipping expenses increased by approximately $5 per package. 44, Advertising expenses were $500 more than budgeted owing to. unplanned printing of flyers for band camp. Miscellaneous expenses, however, were $100 less than budgeted.‘Owner Salaries - Bat ‘Owner Salaries - Bonus Band Repairers Wages Orchestral Repairers Salaries Rush Job Wages Replacement Parts Delivery Contribution Advertising Depreciation Office Rent Miscellaneous Profit 114,000 3,750 80,900 12,000 3,600 48,000 4,500 $s 121,200 3,850 92,050 53,961 eqns 12,500 3,600 48,000 4,400 7,000