Gross Profit (GP) Analysis Case Study
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 |
====== | ====== | ====== | ====== | ====== | ====== | ====== | ====== |
*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 | |||
======== | ======== | ======== | ======== | ======== | ======== | ======== | |
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 | ||||
====== |
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. |
======== | ======== | ======== | |
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. |
======== | ======== | ======== |
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. |
======= | ====== | ====== |
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 |
======= | ======= | ======= | ======= | |
* 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.
You may also be interested in other articles from “Gross Profit Analysis” chapter:
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- Discussion Questions and Answers about Gross Profit Analysis
- Gross Profit Analysis Solved Problems
- Gross Profit Analysis Case Study
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