Cotter Company

Summary

The management of Cotter Company, Inc. realized that its sales were subject to seasonal variations. However, they projected that for the year as a whole the sales volume would equal the production volume, using a stand costing system. They have hired our HKS consulting firm, to analyze their production cost variances to provide their managers with useful insight in controlling the various organizational elements that affect the performance of the production function.

Analysis

1. There are several assumptions that can be made for the $27,000 loss in January compared to the $20,000 profit that was expected. The first thing to consider is that January is the first month that Cotter Company, Inc. started its operations. When starting a new business it can be expected that they will have a large amount of unfavorable variances in the beginning. In the long run, we believe the company will become more stable and will gain a larger sales market as the business is promoted and expanding. This variance also could come from the fact they used standard costs and did not calculate the seasonal variances that they have already realized are part of their business. Therefore, they could have a loss in January, but make up for this loss in a more favorable month for their product.

2. Cotter Company has asked to find the point where they earn exactly zero profit, which is also known as the break-even point. We found their break-even point to be 155,556 units. We are to assume the selling price of their product is $1 per unit. The annual budget shows that their prime costs are 40% of their sales and variable production overhead is equal to 25% of prime costs. Therefore, the variable production overhead is rate is 10% of the sales, and the variable selling and general expenses rate is 5%. To figure out the fixed production overhead and fixed selling and general expenses for the month of January we divided their yearly amounts by 12 months, which gives us...