The first item that one likely notices when reviewing Exhibit 1 of the Waltham

Motors performance report (Bruns, p.3) is the operating loss incurred, as displayed in the
“Actuals” column. Waltham registered a operating income loss of $7,200. A key piece
of information in beginning to analyze the performance of May is determining how many
motors would needed to have been sold for Waltham to break even per their own
budgeted data. As displayed in Exhibit 1 below, dividing the budgeted contribution
margin by the budgeted units sold yields a per-unit contribution margin of $19.51. By
further dividing the budgeted fixed cost by the per-unit contribution margin, we arrive at
the break even volume per unit. That is, 13,327 motors would have to be sold to cover
total costs.

Another important cost calculation is determining the total expected cost per unit
(both variable and fixed), if all manufacturing was allocated to planned production.
Based on the budged data, as drawn again from Exhibit 1 of the accountant’s
performance report (Bruns, 2004, p.3), the total expected cost per unit is $42.93. Please
note the calculations below in Exhibit 2. You may contrast this per-unit cost with that of
the Actual data, as the Actual per-unit cost was higher, at $49.51.

Bruns emphasizes in his essay on understanding costs that while making financial
decisions, “we make the assumption that the predicted costs will be those actually
incurred” (Bruns, 1999, p.3). In reviewing Waltham’s accountant’s performance report,
it is striking that he does not make adjustments for the large contract that Waltham had
recently lost. Such an anticipated reduction in revenue would surely have an effect on
units sold, and as a general principle, would also affect variable costs and operating
leverage as sales volume decreased (Edmonds, 2007, p.392). And indeed, it did
decrease, from a budgeted sales volume of 18,000 units to 14,000 units. We can recall
that sales fluctuations were not seasonal, as noted on page 1 (Bruns, 2004, p.1), which
makes this missight that much more mystifying. As an example, we see in item number 2
in the accoutant’s memo to Sharon, that he maintains the per-unit direct material and
labor costs of $6.00 and $16.00 respectively, both variable costs that would be affected
by the anticipated reduction in revenue. Why does he not adjust his budgeted numbers to
actual units sold, or at least make note of that discrepancy driving budget performance?
In short, in short, my recommendation would be these specific adjustments.

As noted above, the performance of the plant looks different if the actual variable
costs are driven more relevant values. As shown in Exhibit 3 below, we can make more
justifiable cost valuations by adjusting the per-unit price to actual units sold. This, again,
is reasonable given the loss of the large contract, a significant event for Waltham and
obviously known on all levels of the company. As you can see below, the per-unit
variable costs such as direct material and labor and applied to the more relevant sales
volume. In doing so, we see that the total variable costs drop from $432,000 to $398,844,
raising the contribution margin to $287,156. As a result, the month’s performance does
not reflect a loss, but an income of $25,956. This is a significant change to income, and
obviously, reflects positively on overall plant performance.