DODRIO DOORKNOB DESIGN COMPANY

An Individual Business Case

Presented to the
Accountancy Department
De La Salle University

In Partial Fulfillment
Of the course requirements
In ACCTBA3 K38

SUBMITTED TO:
Mr. John Rafael Patron Atienza

SUBMITTED BY:
Arada, Loyd Bryan S.

April 20, 2018

Dodrio Doorknob Design Company manufactures expensive brass doorknobs. It has total
assets amounting to ₱2,500,000 and liabilities of ₱1,500,000.

The fixed costs of producing and marketing the doorknob is ₱500,000. The variable costs per
unit are the manufacturing costs (materials, labor and overhead) and marketing costs of ₱400.
The normal selling price of a doorknob is ₱3,000.

After careful study of the production, it was determined that manufacturing overhead was
closely related to material usage. Thus manufacturing overhead to production is allocated
based on pounds of materials used.

The following are the production standards:

Cost /
Input
Doorknob
Direct Material (brass) 0.3 lb at ₱100 / lb ₱ 30.00
Direct Labor 1.2 hrs at ₱200 / hr 240.00

Variable Manufacturing overhead ₱60 / lb x 0.3 lb

18.00

Actual results for July 2017 are as follows:

Production 35,000 doorknobs

Direct Material Purchased 12,000 lb at ₱110 / lb
Direct Materials Used 10,450 lbs
Direct Labor 38, 500 hrs for ₱8,085,000
Variable Manufacturing overhead ₱641,500
As a managerial accountant and business analyst for Dodrio, the undertakings are as follows:

A. Flexible-budget Variances Part (1-7):

(1) Materials Price Variance

= (Actual Price – Standard Price) x Actual Quantity Purchased
= (₱110 – ₱100) x 12,000 lbs.
= ₱10 x 12,000 lbs.
= ₱ 1,200,000 (U)
The actual material price was more expensive than the standard or budgeted
materials price suggested by the company.
(2) Raw Materials Inventory
= (Actual Quantity Purchased – Actual Quantity Used) x Cost per Pound
= (12,000 lbs. – 10,450 lbs.) x ₱110 per lbs.
= 1,550 lbs. x ₱110 per lbs.
= ₱ 170,500
The company’s unused raw materials amounted to PHP 170,500

(3) Materials Quantity/ Usage Variance

= (Actual Quantity Used – Standard Quantity Allowed for Actual Production) x Standard
Price per Unit
= (10,450 lbs. – 10,500 lbs.) x ₱100
= 50 lbs. x ₱100
= ₱ 5,000 (F)
The company was able to save PHP 5000; the actual qty used is lesser too.

(4) Labor Rate Variance

= (Actual Rate – Standard Rate) x Actual Hours Worked
= (₱210 per Hour – ₱200 per Hour) x 38,500 Hours Worked
= ₱10 x 38,500 Hours Worked
= ₱ 385,000 (U)
The company’s standard labor rate is lesser than the actual labor rate
incurred by the company
 (5) Labor Efficiency Variance
= (Actual Hours Worked – Standard Hours allowed for Actual Output) x Standard Price
= (38,500 Hours Worked – 42,000 Hours Worked) x ₱200
= 3,500 Hours Worked x ₱200
= ₱ 700,000 (F)
Labors have high efficiency because it is favorable.

(6) Variable MOH Rate Variance

= (Actual Price – Standard Price) x Actual Quantity Purchased
= (₱61.39 – ₱60.00) x 10,450 lbs.
= ₱1.39 x 10,450 lbs.
= ₱ 14,500 (U)
The manufacturing overhead of the company is unfavorable.

(7) Variable MOH Efficiency Variance:

= (Actual Quantity Used – Standard Quantity Allowed for Actual Production) x Standard
Price per Unit
= (10,450 lbs. – 10,500 lbs.) x ₱60 per lbs.
= 500 lbs. x ₱60 per lbs.
=₱ 3,000 (U)
The manufacturing overhead is not efficient.

VARIANCES CONCLUSION:
Direct Materials Variance
= Materials Price Variance + Materials Quantity Variance
= ₱ 1,200,000 (U) - ₱ 5,000 (F)
= ₱ 1,195,000 (U)
The overall direct materials have an UNFAVORABLE (U) VARIANCE because of
high cost of materials purchased that did not compensate for the production of the
product.
 Direct Labor Variance
= Labor Rate Variance + Labor Efficiency Variance
= - ₱ 385,000 (U) + ₱ 700,000 (F)
= ₱ 315,000 (F)
The overall direct labor variance has a FAVORABLE (F) VARIANCE mainly due
to the high efficiency of the employees in the workplace.
Manufacturing Overhead Variance
= Overhead Price Variance + Overhead Quantity Variance
= ₱ 14,500 Unfavorable - ₱ 3,000 Favorable
= ₱ 11,500 Unfavorable
The manufacturing overhead variance has an UNFAVORABLE (U) VARIANCE
due to the excessive cost of overhead per unit.

B. Analysis Part (8-14):

(8) How much is the normal contribution margin percentage?
= Contribution Margin ÷ Sales
= (₱ 3,000 – [₱ 400 + ₱ 30 + ₱ 240 + ₱ 18.]) ÷ ₱ 3,000
= ₱ 2,312÷ ₱ 3,000
= 77.07%
(9) How many units must be sold to break even?
= Fixed Expenses ÷ Contribution Margin per Unit
= ₱ 500,000 ÷ ₱ 2,312
= 216 units
(10) How many units must be sold earn a profit of ₱2 million?
= (Target Profit + Fixed Expenses) ÷ Contribution Margin per Unit
= (₱ 2,000,000 + ₱ 500,000) ÷ ₱ 2,312
= ₱ 2,500,000 ÷ ₱ 2,312
= 1,081 units
(11) If 1,500 units are sold, how much is the margin of safety?
₱ 3,851,239.13; 85.60%; 1284 units
 Dodrio Doorknob Design Company
Contribution-Form Income Statement
For the Year Ended December 31, 2018

1,500 Units x
Unites Sold 3000
Sales ₱ 4,500,000.00
Less: Break Even
- 648,760.87
Point
Margin of Safety ₱ 3,851,239.13

Margin of Safety (in Pesos)

= Actual Sales – Breakeven Sales
= ₱ 4,500,000.00 – (₱ 500,000.00 ÷ 77.07%) = ₱ 3,851,239.13

Margin of Safety (in Percentage)

= Breakeven Sales ÷ Actual Sales
= ₱ 3,851,239.13 ÷ ₱ 4,500,000
= 85.60%

Margin of Safety (in Units)

= Breakeven Sales ÷ Unit Sales
= ₱ 3,851,239.13 ÷ ₱ 3,000
= 1,284 units
(12) If 500 units are sold, what is the degree of operating leverage?
(round-off to 2 decimal places)
= Contribution Margin ÷ Net Operating Income
= (500 x ₱ 2,312) ÷ [(500 x ₱ 2,312) – 500,000]
= ₱ 1,158,915 ÷ ₱ 658,915
= 1.76
(13) If 500 units are sold, what is the ROI?
 = ₱ 656,000 ÷ ₱ 2,500,000
= 26.24%
(14) If the target contribution margin percentage is 80%, what should be the selling price?
= Contribution Margin per Unit ÷ Target Contribution Margin Percentage
= ₱ 2,317.83 ÷ 80%
= ₱ 2,897.29 per Unit

C. Special order:
(15)
(New Sales – New Variable Cost) x Unit Sales
= [(₱3,000 x 75%) – (682.17 x 80%)] x 1,000 Units
= (₱2,250 – ₱545.74) x 1,000 Units
= ₱ 1,704.26 x 1,000 Units = ₱ 1,704,260 Increase in Net Operating Income
Memorandum to Management:

Dodrio Doorknob Design Company

April 20, 2018

Dear Mr. CEO,

Good Day! After analyzing the important aspects and details of Dodrio Doorknob Design
Company, I have seen a significant increase in levels of return on investment. I have also found
out through the positive and favorable results of the labor variance that there is a high efficiency
of employee productivity. Because of these findings, I suggest that the company retain the current
employees as they contribute a lot to the company and their labor is very efficient.

On the contrary, the pricing of the materials shows an unfavorable variance which can be
associated to an unfavorable materials price variance. Because of this result, I suggest that the
purchasing manager of the company find other suppliers who offer cheaper materials that could
provide a similar or even higher quality of the same materials needed by the company. Another
suggestion is that the purchasing manager could also try to bargain the price from the supplier
and ask for discounts especially when materials are bought in bulk orders.

I highly suggest that the upper management consider my suggestions as they would help a lot it
maximizing the efficiency of the company in the long run.

Sincerely,

Arada, Loyd Bryan S.

Managerial Accountant of
Dodrio Doorknob Design Company