Gross Profit (GP) Analysis Case Study:
Gross Profit analysis of time sharing computer programs:
The senior system analysis of Tyrene, Inc. Bob
Canedy, developed in his spare time three unique packages of computer programs:
Package 1, inventory control; Package 2, sales analysis; Package 3; report
preparation. After realizing their marketability, he struck out on his own,
forming data-Pack Co., a computer time sharing service bureau. He rented an
adequate computer and leased some data communication lines and terminals, then
placed the packages on-line. Once operational, he planned to sell the use of his
packages to industrial customers by the system-connect-hour, i.e., total time
elapsing while the customer's terminal is directly connected to the central
computer.
In the process of establishing profitable sales
prices, Candey decided to project costs for the first year. Using processing
information provided by the computer sales representative, he allocated the
total cost to the packages as follows:
| |
Computer Rental ($56,000) |
Other Common Costs ($14,000) |
|
|
|
|
|
Package |
(1)
Core Requisitions (000s Bits) |
% of
Total Core Requisitions |
CPU*
Hrs
System Connect Hrs |
(2)
% of Total CPU to System Connect Hrs. |
Weighted Average [4 × Col. (1) - Col. (2)] - 5 |
Common Cost |
Traceable Cost |
Total Cost |
| 1 |
80 |
60% |
0.18 |
10% |
50% |
$35,000 |
$10,000 |
$45,000 |
| 2 |
33 |
25 |
0.90 |
50 |
30 |
21,000 |
14,000 |
35,000 |
| 3 |
20 |
15 |
0.72 |
40 |
20 |
14,000 |
6,000 |
20,000 |
| |
---------- |
---------- |
---------- |
---------- |
---------- |
---------- |
---------- |
---------- |
| Total |
133 |
100% |
1.80 |
100% |
100% |
$70,000 |
$30,000 |
$100,000 |
| |
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*Central
Processing Unit
Working from expected costs, Canedy computed the
desired markup for each of the packages. Since he knew that the useful lives of
the programs were only a few years, he decided to recoup the investment in time
that he had spent on developing the programs by using that criterion in
computing a sales price, as follows:
|
Package |
Workdays Spent in Developing Programs |
(1)
% of Total Development |
Projected Sales (Hrs.) |
(2)
Hourly Cost (Per unit) |
Unit Markup
(1) ×
(2) |
Unit Sales Price |
Total Sales (Hrs. ×
Sales Price) |
| 1 |
27 |
15% |
900 |
$50 |
$7.50 |
$57.50 |
$51,750 |
| 2 |
108 |
60 |
1,000 |
35 |
21.00 |
56.00 |
56,000 |
| 3 |
45 |
25 |
500 |
40 |
10.00 |
50.00 |
25,000 |
| |
----------- |
----------- |
----------- |
----------- |
----------- |
----------- |
----------- |
| Total |
180 |
100% |
2,400 |
|
|
|
$132,750 |
| |
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|
After the first year of operation,
Data-Pack's income statement appeared as follows:
| Sales: |
|
|
|
|
|
|
Package 1: |
1,200 hrs. @
$53 |
|
|
$63,600 |
|
|
Package 2: |
900 @ 58 |
|
|
52,200 |
|
|
Package 3: |
700 @ 46 |
|
|
32,200 |
|
| |
|
|
|
------------- |
$148,000 |
| Cost of goods sold: |
Common |
Traceable |
Total |
|
|
|
Package 1: |
$40,000 |
$14,000 |
$54,000 |
|
|
|
Package 2: |
24,000 |
12,000 |
36,000 |
|
|
|
Package 3: |
16,000 |
5,000 |
21,000 |
|
|
| |
|
|
----------- |
|
111,000 |
| |
|
|
|
|
------------- |
| Operating income |
|
|
|
|
$37,000 |
| |
|
|
|
|
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Although the firm exceeded planned profits by
$4,250, it was evident that changes in demand for the packages and changes
in costs and sales prices made this gain only coincidental.
Required:
A gross profit analysis
to determine the effects of the demand and fluctuating prices on sales
revenue, so that a new price for the most profitable package can be
established.
Solution:
Analysis of Sales Price and Sales Volume Variance
| |
Package 1 |
Package 2 |
Package 3 |
| Actual sales |
$63,600 |
$52,200 |
$32,200 |
Actual sales
hours × budgeted unit sales price
#1: 1,200 hrs. × $57.50 |
69,900 |
50,400 |
35,000 |
| |
------------ |
------------ |
------------ |
| Sales price variance |
$5,400 unfav. |
$1,800 fav. |
$2,800 unfav. |
| |
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| Actual sales × budgeted unit sales
price |
$69,000 |
$50,400 |
$35,000 |
| Budgeted sales |
51,750 |
56,000 |
25,000 |
| |
------------- |
------------- |
------------- |
| Sales volume variance |
$17,250 fav. |
$5,600 unfav. |
$10,000 fav. |
| |
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Analysis of Cost Price and Cost Volume Variance:
| |
Package 1 |
Package 2 |
Package 3 |
| Actual
cost of goods sold |
$54,000 |
$36,000 |
$21,000 |
Actual sales hours ×
budgeted hourly unit cost
#1: 1,200 hrs. × $50 |
60,000 |
31,500 |
28,000 |
| |
------------- |
------------- |
--------- |
| Cost price variance |
$6,000 fav. |
$4,500 unfav. |
$7,000 unfav. |
| |
|
|
|
| Actual sales hours ×
Budgeted hourly unit cost |
$60,000 |
$31,500 |
$28,000 |
| Budgeted cost |
45,000 |
35,000 |
20,000 |
| |
------------ |
------------ |
--------- |
| Cost volume variance |
$15,000 unfav. |
$3,500 fav. |
$8,000 unfav. |
| |
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Recapitulation of Sales Price Variance, Sales Volume Variance, Cost
Price Variance, and Cost Volume Variance:
| |
Sales
Price |
Sales
Volume |
Cost
Price |
Cost
Volume |
| Package 1 |
$ 5,400 U* |
$17,250 F** |
$ 6,000 F |
$15,000 U |
| Package 2 |
1,800 F |
5,600 U |
4,500 U |
3,500 F |
| Package 3 |
2,800 U |
10,000 F |
7,000 F |
8,000 U |
| |
---------- |
---------- |
---------- |
------ |
| Net variance |
$6,400 U |
$21,650 F |
$8,500 F |
$19,500 U |
| |
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*
Favorable
** Unfavorable |
Combining the net favorable sales volume
variance of $21,650 with the net unfavorable cost volume variance of $19,500
leads to a net favorable volume variance of $2,150 that can be further
analyzed into the sales mix variance and final
sales volume variance.
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