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
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*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
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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
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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.
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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.
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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.
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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
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* 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
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