Accounting

Q1. Velazquez Designs

Velazquez Designs manufacturers wallpaper. Management at Velazquez expects sales next quarter

to be 10,000 roles of wallpaper at a selling price of $8 per roll. Velazquez has limited inventory of

wallpaper on hand and wants to increase its inventory. Velazquez uses a traditional full absorption

costing system to compute average total cost per roll of wallpaper, and uses this information to pay

managers quarterly bonuses based on operating income. The following table shows how costs are

expected to behave at various production levels.

Alternative Production Levels

Production (rolls of wallpaper) 10,000 11,000 12,000 13,000 14,000

Fixed product cost (total) $40,000 $40,000 $40,000 $40,000 $40,000

Variable product cost (total) $30,000 $35,900 $41,600 $48,270 $55,900

Requirements:

1. Based on the data, what level of production would management choose in order to

maximize operating income?

2. How does the combination of a full absorption costing system and bonuses based on

operating income incentivize managers to behave in terms of matching production with

sales?

3. Is this matching situation sustainable in the ìlong-termî?

4. Please do all the calculation in excel and provide me the excel worksheet as well.

Q2. Baker and Klatt

Baker and Klatt (BK) is a professional services firm that earns a large portion of its revenue from

non-profit clients. In Year 2, BKís billable hours for non-profit clients increased 20% from Year

1 levels, but, as the data below shows, profits were the same in Year 2 as in Year 1.

Year 2 Year 1

Billable hours 30,000 hours 25,000 hours

Revenue $3,400,000 $3,000,000

Professional Costs:

Professional salaries (variable) 1,850,000 1,500,000

Client support costs (all variable) 470,000 400,000

General administration (all fixed) 680,000 700,000

Operating income $400,000 $400,000

Requirements:

1. Analyze all drivers of the Year 2 results compared with Year 1. Please present your analysis in

the following example format:

a) Prepare flexible budget

b) Calculate variances

c) Label variances as Favorable or Unfavorable

2. Please do all the calculation in excel and provide me the excel worksheet as well.

Example format:

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