Mountain Spring manufactures and sells varieties of sports drink (berry, lemon and orange) in bulk to upmarket. Budgeted and actual results for 2019 are as follows:
| Mountain Spring | ||||
| Income Statement | ||||
| Year Ended 30 June 2019 | ||||
| budget | actual | |||
| sales revenue | $ | 18,680,000 | 19,079,500 | |
| variable costs | $ | (11,400,000) | (11,794,000) | |
| contribution margin | $ | 7,280,000 | 7,285,500 | |
| non-variable costs | $ | (5,580,000) | (5,680,000) | |
| net operating profit | $ | 1,700,000 | 1,605,500 | |
| Product Breakdown | ||||
| Berry | ||||
| sales volume | Boxes | 500,000 | 400,000 | |
| selling price | $ per box | 7.00 | 6.90 | |
| variable costs | $ per box | (4.50) | (4.40) | |
| contribution margin | $ per box | 2.50 | 2.50 | |
| Lemon | ||||
| sales volume | Boxes | 900,000 | 1,100,000 | |
| selling price | $ per box | 7.00 | 6.90 | |
| variable costs | $ per box | (4.00) | (4.30) | |
| contribution margin | $ per box | 3.00 | 2.60 | |
| Orange | ||||
| sales volume | Boxes | 1,110,000 | 1,105,000 | |
| selling price | $ per box | 8.00 | 7.90 | |
| variable costs | $ per box | (5.00) | (4.80) | |
| contribution margin | $ per box | 3.00 | 3.10 | |
| All Products Combined | ||||
| sales volume | Boxes | 2,510,000 | 2,605,000 | |
| market share | 11.409% | 13.025% | ||
| selling price | $ per box | 7.44 | 7.32 | |
| variable costs | $ per box | (4.54) | (4.53) | |
| contribution margin | $ per box | 2.90 | 2.80 |
When preparing its budget for 2019, the company assumed that there would be a global market for 22,000,000 boxes of sports drinks and that Mountain Spring’s product would have a 11.409% share of this market.
However, a recent debate on sports drinks argue that while traditional sports drinks are designed to provide athletes with the right balance of carbohydrates, fluids and electrolytes during exercise, they do more harm than good, if you’re just quenching a thirst, because sports drinks contain high level of sugar. As a result, during 2019 both Mountain Spring and its competitors were adversely affected by diminishing consumer in sport drink products. The actual total market size was only 20,000,000 boxes.
The Sales director of Mountain Spring recently explained how they attempted to respond to the difficulties which it faced in 2019: “First, we reduced our selling price for all products; this was a modest price reduction in comparison with those of our smaller competitors. Second, as a pilot project, we introduce natural ingredients such as natural sweetener to add value to our lemon sports drink. In doing so, we try to increase consumer confidence in the health of our product. Finally, to promote our new design lemon sports drink, we run several marketing campaigns as demonstrating the benefits of sports drinks, in particular, the health of our lemon sports drink (with all-natural ingredients) to the sport players.
Required:
1. Complete the flexible budget (fill the green area on excel template) and associated variances using the template provided. (Please copy and paste the table with your calculations from Microsoft Excel to your Word File);
2. Complete reconciliation of variances using the template provided (Calculate the profit variances and reconcile the actual operating profit to the planned operating profit using the template provided. (Please copy and paste the table with your calculations from Microsoft Excel to your Word File);
3. The company’s director board is not happy with the net profit generate this year, as the actual net profit is less than the budgeted net profit. You are the consultant of the company and are require providing a report of variance analysis based on the results you have calculated in Q.1 and Q2. In your response, you should:
- Discuss how the variances may relate to each other?
- Critically evaluate the performance of Mountain Spring’s sales director in 2019, supporting your answer by reference to the sale volume and sales price variances which you have calculated (For example, what are the favourable and unfavourable variance? What are the drivers of the variances?).
- What recommendations do you have for future improvement?