Solomon Doostkhah, manager of the Cricket Bats Division of the Mideast Manufacturing Company, is furious that the accountant’s report showed a divisional profit for the past week of $2150, because this is not consistent with the expected profit for the number of bats manufactured. The profit expected was:
Number of bats to be made 300
Transfer price at which the division sold the bats to the stores $19 500
Cost: Material $8 500
Labour $3 500
Overhead (all fixed) $5 000
Profit $2 500
The number of bats actually made for the week was 330, so Solomon expected to make a profit of $2750. However, the profit shown was:
Number of bats to be made 330
Transfer price at which the division sold the bats to the stores $21,450
Cost: Material $9,500
Labour $3,700
Overhead (all fixed) $6,100
Profit $2 150
Solomon storms into the office of Lindy Andanson, the accountant, seeking an explanation.
Help Lindy prepare a report for Solomon, explaining why the actual profit was lower than the expected profit. (Hint – you will need to prepare a flexible budget comparing the actual results, to the budgeted results – at a level of 330 bats)
