In 2010, Store 88 introduced a promotion aimed at increasing sales on weekdays and balancing demand. This initiative was based on an analysis of customer preferences which showed that the majority of services (around 80%) were availed on Fridays, Saturdays, and Mondays, while only 20% were utilized on Tuesdays, Wednesdays, and Thursdays. To tackle this issue, the store implemented a program that involved reducing the service price to $18 for weekdays (specifically Tuesdays, Wednesdays, and Thursdays) and raising it to $30 for weekends (specifically Fridays, Saturdays, and Mondays). Alongside this pricing strategy adjustment, the store also optimized staff schedules and decreased allocated labor time from 2,500 hours to 2,250 hours per employee.
In addition to the budgeted operating statement and the actual operating statement for 2010, a flexible budget was created to enhance the analysis. This flexible budget adjusts both revenues and expenses based on the actual output level achieved. It allows for an analysis of increased sales units using the budgeted rates for variable costs and fixed expenses. The flexible budget provides insights into variances related to selling price, sales volume, sales mix, variable cost per unit, and total fixed costs. The breakdown of the total operating income variance is provided for reference. Below is a detailed analysis of the findings.
In 2010, store 88 saw a 5% increase in pet grooming services, going from the budgeted amount of 10,000 to 10,500. This growth can be attributed to a promotion aimed at increasing mid-week sales. The strategy behind the promotion was to balance demand and labor throughout the week by lowering prices for mid-week services and raising prices for weekend services. As a result, service units increased by 5% and gross sales increased by 11%. The average unit price also rose from $25 to $26.40. This increase indicates that demand for weekend services remained high, as more customers opted for the $30 service over the $18 service.
By categorizing services into two groups, the store established a sales mix.
2010 Sales Mix:
X = $18 services
Y = $30 services
X + Y = 10,500
18Y + 30X = 277,200
To solve this equation:
Multiply each service by 18:
18X + 18Y = 189,000
Substitute 18Y with 277,200 – 30X:
18X + 277,200 – 30X = 189,000
X = 7,350
Substitute X into the equation 18X + 18Y = 189,000 and solve for Y:
Y = 3,150
In 2010, the store had 3,150 mid-week sales (30%) and 7,350 weekend sales (70%). This indicates that the marketing strategy increased mid-week sales from 20% to 30%. This sales mix resulted in differences between the actual operating income and the budgeted operating income.
The flexible budget, flexible-budget variances, and sales volume variances provide further analysis into the profitability of the operations. The use of the flexible budget allows for comparison between the budgeted operating income and the actual sales. By comparing the flexible budget to the actual budget, you can assess the total sales and cost incurred considering the same units sold. The sales price variance, which is the difference between actual sales and flexible budgeted sales, was $14,700 favorable. This indicates that the actual sales exceeded the budgeted sales at that usage. The increase in service price from $25 to $26 contributed to this outcome. The price variance for material usage exceeded the flexible budget projection by $2,100, possibly due to overuse or waste of materials. As anticipated, the direct labor price variance was $3,375 lower than the flexible budget amount, owing to effective labor management by the manager. Operating expenses surpassed the flexible budget prediction by $3,675. However, in other expenses, training expenses were lower than projected by the flexible budget. While training hours were expected to reach 18 for the year (three employees with six hours of training each), only 11 hours were actually incurred.
Despite a positive difference in the breakdown of operating income variance, store 88 may experience a decline in service quality due to a lack of training. The advertising expenses for the store exceeded the amount budgeted by $1200. This increase in advertising costs is a result of the implementation of a new program and pricing strategy, which required additional marketing efforts to inform customers of the changes. PG&C suggests that advertising expenses should be 1% of sales, but the manager of store 88 decided to allocate a higher percentage towards advertising. The cost of service development is based on the total sales of the store.
The number is higher as total sales exceeded the projected amount in the flexible budget. The head office of PG&C pays for accounting, insurance, taxes, and management overhead expenses, which are then allocated based on a formula considering store size, store sales, and store age. In 2010, all these costs surpassed the budgeted amount. Accounting and insurance exceeded the budget by $1,750 (15%), taxes were $1,000 higher (9%), and management overhead was $13,000 higher (25%). It is challenging for the store to estimate these costs since they are determined by the PG&C home office.
The employee benefit price variance is $675 favorable compared to the flexible budget due to a decrease in labor usage. The total flexible-budget variance for 2010 reflects the difference between the flexible-budget operating income and the actual operating income earned during that time period. In the case of store 88, the total flexible-budget variance was $5,845 unfavorable. Despite higher gross sales, the increase in variable expenses such as materials and operating expenses, as well as other expenses dependent on sales, outweighed the sales increase.
When comparing the flexible budget to the master budget, the analysis focuses on the difference in sales volume. The usage variance between flexible budget sales and master budget sales is $12,500 favorable, resulting from a 500 increase in services. However, all variable expenses show an unfavorable sales volume variance due to the increase in sales units. In the case of other expenses where the flexible budget and budget differ, the sales volume variance remains unfavorable, again attributed to the increase in sales units.
The sales volume variance measures the impact that changes in sales volume have on the revenue, expenses, contribution margin, or operating income of the period. In 2010, Store 88 experienced a favorable sales volume variance of $6,250. This favorable variance is attributable to an increase in sales services, while still using the budgeted data for selling price and variable cost per unit. Additionally, it is assumed that fixed costs remained unchanged, further contributing to the positive result. The total operating income variance represents the discrepancy between the actual net income and the budgeted income.
This is the number that the executives use to analyze net income increases over the budget. Store 88 incurred $405 more in actual net income than the budgeted amount. Throughout the year of 2010, store 88 actively pursued a marketing strategy to increase mid-week services. That strategy successfully changed the sales mix to 30 percent mid-week and 70 percent weekend as compared to 20 percent and 80 percent in past years. While increasing mid-week sales, the pricing strategy also increased the unit sales cost to $26.40.
Both of these combinations result in greater gross sales for the store. This promotion and pricing strategy can be effectively employed by other store locations to balance services and allocate labor more efficiently. However, these increases were counteracted by unexpectedly high variable expenses (excluding labor) and other expenses, which are distributed by the home office of PG&C. The largest increases were observed in the accounting, insurance, taxes, and management overhead allocations. As these costs are determined by a formula utilized by the home office, it is challenging for the store to adequately prepare for them.
If the home office were to provide the stores with detailed information about those formulas, the stores would have the necessary knowledge to make management decisions that align with reducing those costs. Regrettably, the stores are only assessed based on actual net income increases compared to the budgeted amount. This evaluation fails to encompass all the information presented in this analysis. PG&C has the option to conduct a comprehensive flexible-budget analysis of store operations in order to gain a better understanding of the variations in operating income.
This information would inform PG&C and store managers about the profitable and unprofitable differences that stores encounter. Furthermore, PG&C could establish a bonus program for managers who come up with successful and creative marketing initiatives. In 2010, store 88 saw an increase in services offered, unit service prices, and mid-week services. It would be advantageous to share these improvements with other similar store locations that have similar sales patterns. Both the stores and PG&C headquarters benefit when innovative and profitable programs are promoted and shared among stores.
