Funtime, Inc manufactures videogames machines. Funtime, Inc encountered decline in profits as a result of the modernized technology. To offset the decline in profits the management team focused on manufacturing economics and increased production by developing an incentive program for production managers whose contribution allowed for an increase in the amount of units produced and a decrease in its cost. The production management team improved manufacturing by increasing the number of completed units beyond normal production levels. To put together the videogame machines the assembly group required parts from the printed circuit boards (PCH) and the reading heads (RH). To achieve increased production, the parts were not carefully produced which resulted in the rejection of the parts that were not tested and modified to meet manufacturing standards. The preventive maintenance that would have been used was postponed and only emergency repair was being carried out to keep production going. As a result of the pressure on the production group to focus on their machine there was machine downtime in the PCH and RH groups along with the demand for the parts led to more parts being rejected. Analysis
Based on Funtime’s newly implemented incentive program, which rewards managers for increased output and cost savings, expectations were to see an increase in output and cost savings. Numbers on the contribution report show how the incentive program is working thus far. It can be seen in the table below that the goal of increasing output is being achieved as output is 200 units over budget. Despite the increased output, the goal of decreasing cost is failing thus far. There is an unfavorable contribution margin variance to budget of $58,660. The components that are driving that unfavorable contribution margin variance are in the analysis below.
The first component of the unfavorable contribution margin is direct...