For the Squeaky Horn Company, it faces with decreases in profitability. To solve this problem, the company has two alternatives.
Alternative 1: Status Quo
Alternative 2: Charge minor band repairs on a flat-fee basis and pay the band repairers on per-job basis and charge delivery fees.
The company can choose to stick to its original costing system and make no changes to the current business model.
Under the original system, both owners and employees are familiar with the current status and can work comfortably as usual. The service quality would stay the same and the original customers are also familiar with the company’s service and pricing system and could remain loyal to the company. Moreover, the current costing system and pricing system are consistent with the market niche strategy. Although there is a decrease in profitability, the company is still profitable and there is no risk of losing profits or customers since there are no changes.
The current costing system has some loopholes that result in the lack of efficiency, which in turn leads to the decline in profits. Since the company pays the employees as it planned, there would be zero labor rate variance. The only existing variance that leads to the difference between planned budget and actual budget is labor efficiency variance.
As we can see from appendix A, the major unfavorable efficiency difference is under minor band repairs, which is $34,800. Major jobs are performed by the three owners. Since the actual hour per job is the same as planned hour per job for major band repairs, labor efficiency variance does not exist for band major repairs. As for orchestral major repairs, although there is one-hour difference between actual hours per job and planned hours per job, this does not result many differences for the reason that the...
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