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Handler Company distributes two power tools to hardware stores—a heavy duty ½ inch hand drill and a table saw. The tools are purchased from a manufacturer where the Handler private label is attached. The wholesale selling prices to the hardware stores are $60 each for the drill and $120 each for the table saw. The 2005 budget and actual results are presented below. The budget was adopted in late 2004 and was based upon Handler’s estimated share of the market for the two tools. During the first quarter of 2005, Handler’s management estimated that the total market for these tools would actually be 10% below its original estimates. In an attempt to prevent Handler’s unit sales from declining as much as industry projections, management developed and implemented a marketing program. Included in the program were dealer discounts and increased direct advertising. The table saw line was emphasized in this program. Questions A. Analyze the unfavorable gross margin variance of $1,184,000 in terms of: 1. sales price variance 2. cost variance 3. volume variance B. Discuss the apparent effect of Handler Company’s special marketing program (i.e., dealer discounts and additional advertising) on 2005 operating results. Support your comments with numerical data where appropriate. |