I wanted to see if this can get done asap for tomorrow morning, I already sent it 2 days ago but it hasn't been done yet.
Microsoft Word - LLJ Case 2021 updated.docx 1 LLJ Satellites: Variance Analysis and Budgeting Jack Childs is nervous about his company's future performance. The Childs family own 40% of the shares of LLJ Satellites, and generally has control over the direction of the company. In fact, Jack is currently the CFO and is also a member of the Board of Directors. However, outside shareholders are becoming increasingly anxious due to poor operating results from the past few years. You have been hired by Jack into the controller’s office to provide some fresh perspectives about operations at LLJ Satellites. For your first assignment, Jack asks you to review the financial information from the last fiscal year and to help create a budgeted plan for the next fiscal year. To help you complete this assignment, Jack has provided you with various financial data relating to the previous fiscal year as well as a brief synopsis of the firm’s business model. LLJ Satellites – Company Overview LLJ Satellites makes two types of specialized transistors for satellite communication reception: an advanced and a basic device. At the beginning of each fiscal year, the company creates a projected income statement for planning purposes. Below is the budgeted income statement for the past fiscal year and standard cost information used to create the budget. Currently, the company uses a plant-wide predetermined manufacturing overhead rate to apply manufacturing overhead to its products. Manufacturing overhead includes indirect manufacturing costs such as plant utilities, factory depreciation, plant maintenance, and production supervisor’s salaries. Basically, manufacturing overhead costs include all factory- related costs that are not direct materials or direct labor. These costs are generally estimated using a predetermined manufacturing overhead rate based on a chosen cost driver. Budgeted 2 manufacturing overhead is typically calculated using the following formula: Budgeted MOH = Predetermined MOH Rate * Budgeted Cost Driver Amount. LLJ Satellites has chosen Machine Hours for its cost driver to calculate budgeted manufacturing overhead. For example, the $14,250,000 of Budgeted MOH in Table 1 for the Advanced Units = $9.50 per machine hour * 300,000 projected advanced units * 5 projected machine hours per advanced unit (information taken from Tables 1 and 2). Table 1: Budgeted Income Statement for Previous Fiscal Year Revenues – Advanced (Projected Sales = 300,000 units) $53,940,000 COGS - Advanced Direct Materials $18,104,000 Direct Labor $17,670,000 Budgeted MOH $12,845,625 Gross Margin - Advanced $5,320,375 Revenues – Basic (Projected Sales = 350,000 units) $48,240,000 COGS - Basic Direct Materials $12,132,000 Direct Labor $20,520,000 Budgeted MOH $8,775,000 Gross Margin - Basic $6,813,000 Total Gross Margin $12,133,375 Selling Costs Commissions (2 percent of revenues) $2,043,600 Salaries $460,000 Fixed Administrative Costs $1,800,000 Interest $550,000 Pre-Tax Income $7,279,775 3 The company employs a just-in-time inventory system for all of its inventory types (raw materials, work-in-process, and finished goods inventory). Because LLJ Satellites supplies major satellite companies, the company can accurately predict production needs in advance. Thus, the company carries little or no balances in any inventory account. For example, the raw materials manager only buys aluminum and plastic when it will be immediately used in production and no inventory of materials is kept on hand. You can assume all beginning and ending inventory balances are zero for this case. Table 2: Standard Cost Card for Previous Fiscal Year Advanced Device Basic Device Direct Materials Ounces of Plastic per Unit 6.00 9.00 Cost per Ounce of Plastic $2.40 $2.40 Ounces of Aluminum per Unit 2.00 0.55 Cost per Ounce of Aluminum $22.00 $22.00 Direct Labor DL Hours per Unit (Components) 1.00 2.00 DL Hours per Unit (Assembly) 3.00 2.00 Total DL Hours per Unit 4.00 4.00 Cost per DL Hour $14.25 $14.25 Manufacturing Overhead (machine hours is the chosen cost driver) Machine Hours per Unit (Components) 2.50 0.75 Machine Hours per Unit (Assembly) 1.75 1.75 Total Machine Hours per Unit 4.25 2.50 Pre-Determined MOH Rate per Machine Hour $9.75 $9.75 4 LLJ Satellites has created a standard cost card (Table 2) to set expectations for factory workers and supervisors. The company has tried to set attainable and realistic standard costs and usages in developing these standards. As seen in the standard cost card (Table 2), all production units go through two production departments: Components (where the various components in each receiver are produced) and Assembly (where the receivers are assembled). Details regarding all expected per-unit manufacturing costs for the two product types are found on the standard cost card. This cost card is typically updated each year to reflect changes in prices and production usages of resources. Jack is concerned because actual year-end income fell short of projected income for the third straight year (see actual income for the previous fiscal year in Table 3). While reviewing these results with factory managers, the factory managers were unsurprised by the lower-than- expected margins for both types of units. They described difficulties in working with new suppliers of aluminum and plastic. The company chose new to use new suppliers mid-year due to market pressures in these supplies. As such, Jack suggests you focus on evaluating each of these material types separately in your analyses. Factory managers were also concerned that the current manufacturing standards may not reflect difficulties between the two manufacturing departments. Jack tells you of some minor heard complaints from some workers about working in the Components department during this past year. In efforts to approve morale and after extended negotiations, the company increased the wage rate of all factory employees to $14.25 per hour at the beginning of the fourth quarter. Production managers also expressed skepticism about the current model to assign manufacturing overhead between the two departments. Currently, LLJ Satellites uses a single, plant-wide manufacturing overhead rate to estimate overhead costs based on machine hours. This 5 estimate is calculated as the actual machine hours used in production multiplied by the pre- determined manufacturing overhead rate described earlier. Estimates are commonly used in businesses until actual manufacturing overhead costs are known at the end of the fiscal period. At the end of the year, these estimates are “trued-up” or adjusted to match actual known costs. Managers seemed especially skeptical of the overhead costs assigned to the Assembly department. They also questioned if these estimates will be accurate if production increases or decreases significantly. Jack also describes other strategic decisions made during the past year to try and improve profitability. Most importantly, he notes that the company changed its pricing and selling strategies very early in the fiscal year (after the budget was set) in an attempt to jumpstart sales in the recessionary economy. The company also eliminated one sales position, saving on the salary of this salesperson, and eliminated a management employee training program that represented a $145,000 savings in administration costs. Unfortunately, the company had an unexpected cash shortage in September. Thus, the firm needed a costly emergency short-term loan that significantly increased the interest costs for LLJ Satellites. Jack wants assistance understanding other reasons why the company fell short of budgeted projections. 6 Table 3: Actual Income Statement for Previous Fiscal Year Revenues – Advanced (Actual Sales = 360,000 units) $60,840,000 COGS - Advanced Direct Materialsa $20,952,000 Direct Laborb $20,880,000 Actual MOHc $17,100,000 Gross Margin - Advanced $1,908,000 Revenues – Basic (Actual Sales = 210,000 units) $30,240,000 COGS - Basic Direct Materialsa $7,136,850 Direct Laborb $12,484,500 Actual MOHc $6,300,000 Gross Margin - Basic $4,318,650 Total Gross Margin $6,226,650 Selling Costs Commissions (2 percent of revenues) $1,821,600 Salaries $430,000 Fixed Administrative Costs $1,510,000 Interest $650,000 Pre-Tax Income (Loss) $1,815,050 a – Direct materials costs consist of 2,160,000 ounces of plastic for the advanced units and 1,911,000 ounces of plastic for the basic; plus 756,000 ounces of silicon for the advanced units and 126,000 for the basic units. The average price paid was $2.35 per ounce for plastic and $21.00 per ounce for silicon. b – Actual direct labors totaled 780,000 hours in the Electrical Components department and 1,521,000 hours in the Assembly department for the fiscal year. c – Actual machine hours totaled 1,200,000 hours in the Electrical Components department and 1,140,000 hours in the Assembly department for the fiscal year. 7 Looking Forward – Planning for the Next Fiscal Year On the advice of outside shareholders, Jack has agreed to change its product pricing strategy. Specifically, the firm is planning on charging $178 for an advanced unit and $138 for a basic unit. Due to a projected improvement in the overall economy, the sales teams believes they can sell 390,000 units of the advanced device and 330,000 units of the basic device at those prices. Sales in this industry are cyclical and the company expects 50 percent of the total sales to occur in the fourth quarter. For simplicity, assume the remaining 50 percent of annuals sales are uniform throughout the first three quarters of the year. Based on the variance analysis, some changes may be needed in the standard costs used for budgeting and planning purposes. However, unless your variance or other analyses suggest otherwise, all of the standard usages