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
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
3. Is this matching situation sustainable in the “long-term”?
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, BK’s 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 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
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.
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Q1. Velazquez Designs