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Performance Drinks, LLC final project




Question;Case;#3 ? Performance Drinks -A further study of;Regression;Analysis;Contribution;Margin Reporting;Cost-Volume-Profit;Analysis;Differential;Analysis;Capital;Budgeting;Written;by;Tim;Bergsma, CMA, CFE;Assistant;Professor ? Accounting;Davenport;University;Donald;W. Maine ? College of Business;Background;Performance Drinks, LLC is owned by;Dave N. Port. Performance Drinks;produces a variety of sports centered drinks.;They began operations in 1993 shortly after Mr. Port graduated with his;M.B.A. from Davenport University. The;company saw early success as sports and fitness nutritional products gained new;popularity in the 1990?s. Financially;the company is sound and has been wise in controlling their growth over the;years. However, within the last 18;months Mr. Port has noticed a drop in overall company profitability. This is especially troubling considering that;the company has continued to experience top-line growth. Mr. Port and his management team have been;considering developing a new product line.;However, those plans have been put on hold until they can figure out why;their profits are shrinking.;Performance Drinks makes four;different kinds of sports drinks. Those;drinks are as follows;?;Basic;?;Hydration;?;Intensity;?;Post-Workout;Each;of these drinks contains a slightly different nutritional profile and is;targeted for different users and uses.;The Basic drink has the least nutritional benefit and is targeted for;general consumption. The Hydration;product targets endurance athletes and specializes in hydration;replacement. The Intensity product was;designed with energy enhancement in mind. It serves the needs of extreme;athletes who need long durations of sustained energy. Lastly, the Post-Workout product is a;nutritional replacement product that is generally used following exertion.;Information Related to Case #2(this section is the same as you received when you were assigned;Case #2);You;are the Controller for Performance Drinks.;You feel as though you have a good handle on the financial reporting and;the overall company performance.;However, admittedly, your accounting information system has been;designed to serve the needs of external users from an aggregate perspective. To that end you utilize absorption costing;exclusively within the organization. You;recall studying the concept of Activity Based Management (ABM) and Activity;Based Costing (ABC) while taking a managerial accounting course. You wonder if applying those ideas to your;business would help to uncover the mystery of the disappearing profits.;You recall from your Management;Accounting class that product costs are comprised of;?;Direct Materials;?;Direct Labor;?;Manufacturing Overhead;You;don?t suspect that anything strange is going with your direct costs. You do wonder, however, if a more thorough;understanding of your indirect costs may be in order. Over a series of weeks you talk with a;variety of employees, representing a multitude of functional areas, from within;the company. During those conversations;you take careful note on what activities might be consuming resources and how;those activities might be measured. You;sharpen your pencil and begin to unpack what you?ve learned. You start with reviewing last month?s;Product-Level Profit Report. That report;is following;Since your primary area of focus is;on the indirect costs you compile the following report which further details;your overhead charges;Overhead;Activities;Using;traditional costing methods, which support your absorption costing system, you;base overhead allocation on direct labor cost.;Furthermore, ?fringe benefits? are a function of direct labor cost.;As;a result of your many meetings to discuss company overhead you determine that;the majority of your indirect costs are related to four primary;activities. Those activities are;equipment set-ups, production runs, production management and machine-hour;capacity. ?Production Management? refers;to a number of items that are correlated to the number of products the company;produces. Ultimately you determine that;your key activities have the following usage patterns, as they pertain to the;monthly overhead costs;Upon reviewing budget data from the;last budget cycle you discover that the monthly number of set-ups was estimated;to be 85. The number of production runs;was estimated to be 250. That monthly;machine-hour capacity is presently at 20,000 machine-hours. Lastly, Performance Drinks produces a total;of four products.;After talking with the Plant Manager;you create the following usage data relative to products and activities;New;Information Pertaining to Case #3;The financial;reporting to date has been done using absorption costing. That is to say that the manufacturing costs;included direct materials, direct labor, variable manufacturing overhead and;fixed manufacturing overhead. In this;sense the Income Statements have historically reported Gross Margin. Following is a Monthly Income Statement;based on absorption costing, for Performance Drinks;You;begin to wonder if there would be any value in repackaging the income statement;in a way that would report Contribution Margin as opposed to Gross Margin. You know that in order to report Contribution;Margin you will need to understand your costs as variable and fixed. Unfortunately the general ledger does not;specifically report costs as variable and fixed. You remember learning that regression;analysis can be used to generate data that can be used to create a total cost;equation. With the total cost equation we;can understand our total cost as the sum of fixed costs and variable;costs. After doing some research your;collect the following data related to overhead and possible causal factors;Requirement;#1;Using the data above, which;has also been provided electronically in Excel, run the following regression;analyses;Linear;regression analyzing total overhead cost and units soldLinear;regression analyzing total overhead cost and machine hours usedMultiple;regression analysis analyzing total overhead cost along with both units;sold and machine hours used;Requirement;#2;Based on the results from the three;regression analyses determine which correlation provides the best estimate of;the total cost equation. Explain why you;selected the correlation that you did.;Requirement;#3;Write out the total cost equation;using the results from the multiple regression test.;Requirement;#4;Create a ?Contribution? formatted;income statement using the results from the multiple regression test. Use the following additional information;regarding machine hours, used by each product, which has also been provided in;Excel electronically;Reference the following sales volumes, by product, for;your cost allocation related to units sold;Use the following template as a guide for the format;of your ?Contribution? Income Statement;Requirement;#5;Compute the following;?;Break-even point in units;?;Break-even point in sales dollars;?;Targeted profit point in units (use;$50,000 as your targeted profit point);?;Margin of Safety;Requirement;#6;A new customer has surfaced. That customer has asked you to consider;producing a special one-time order for them.;This special order would require a modification to the recipe that will;slightly increase the variable cost per unit.;Furthermore, there would be a small fixed cost addition. The details for the order as follows;Conduct a;differential analysis regarding this special order. Would you accept this order under the;conditions provided? Explain and defend;your position.;Requirement;#7;Your management team has asked you;to consider investing in a new piece of equipment. The details of that investment opportunity;are following;The discount;rate for this project is 5%. Compute the;following;?;Net Present Value;?;Internal Rate of Return;Would you recommend;investing in this new piece of equipment?;Explain and defend your position.;Clarification;on format and data;Clear;communication and professionalism are important. Defending your answer with data is;important.;?;An electronic copy of this Case (this;document) is available within Blackboard.;Additionally, an Excel file, containing the necessary data for the case;will be available within Blackboard.;?;Create one professional report, in Word;that contains all of answers. In that;report you should clearly label all of your answers. Make your answers easy to read and find. Imagine you were giving this report to your;boss. Further imagine you have to lead;your boss and the executive team through your findings. You will then have one Word document as your;final product. You will also have one Excel file.;?;Grading is based on both accuracy (see;rubric) and your ability to communicate your answers professionally and;clearly.;?;Use the following naming structure for;your files: last name_first initial_case3.docx.;Of course your Excel file will have an.xls suffix.;?;Double space your report.;?;Put good thought into how you organize;your Excel document. Part of your grade will be based upon the usability and;layout of your Excel file. Imagine that have to give the electronic copy of;your Excel file to your boss, or a peer, to work with. Imagine that you could not coach them at all;on how to use your file. Is your file;organized and labeled so clearly that anyone could use it, easily, without;instructions from you? You want to;strive for that kind of clarity in your work.;?;Your report should have a title page.;Use APA 6th edition for guidance on title pages.;?;You will also upload to Blackboard both;your Word document and your Excel file.;Grading;Rubric;Total >>;150;Requirement;Points;Possible;Accuracy - Requirement #1 (Regression;Analysis);15;Accuracy - Requirement #2 (Regression;Comments);10;Accuracy - Requirement #3 (Total Cost;Equation);5;Accuracy - Requirement #4 (Income;Statement);25;Presentation - Requirement #4 (Profit;Report);15;Accuracy - Requirement #5 (CVP);15;Accuracy - Requirement #6 (Differential;Analysis);15;Quality - Requirement #6 (Differential;Analysis);10;Accuracy - Requirement #7 (Capital;Budgeting);10;Quality - Requirement #7 (Capital;Budgeting);10;Quality - Excel File (Organization /;Usability);10;Overall Professionalism;10;Notes;1.;Quality" scoring is based up the comprehensiveness of your;work. Did you answer the questions asked?;Are those answers correct and / or reasonable? Did you defend your;answers where appropriate?;2.;Presentation" scoring is based on how your report/work;reads. Is your work well organized?;Did you include all necessary supporting work? Is your work labeled well?


Paper#51368 | Written in 18-Jul-2015

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