5. College Painters was founded by Cody and John, two seniors in high school, to

Question

5.   College Painters was founded by Cody and John, two seniors in high school, to help pay their way through college. Fully bonded and insured, College Painters specializes in faux finishes, such as marbleizing, sponging, ragging and washing. While Cody and John used to do all the work themselves, now ten years later, they have crews performing the work. They visit worksites every day to be sure that jobs meet their quality standards and well as meeting prospective customers and preparing bids.

Cody and John budget for 25,000 square feet (sf) of business a month. The average job is 500 sf., and for such a job, Cody and John expect to incur the following costs:

Materials (paint)

1.6 gallons @ $25.00 per gallon

Materials (supplies)

$10.00

Labor (includes surface prep and applying the paint and faux finish)

16 hours @ $15.00 per hour

To arrive at a selling price, Cody and John mark up the budgeted paint cost by 50% and the budgeted labor cost by 100% and the budgeted cost of supplies. Thus the starting point for constructing a bid is:

   $550 = (1.5 x 1.6 x $25) + (2.00 x 16 x $15) + 10

Of course, Cody and John adjust the starting price to reflect prevailing market conditions. For example, they charge more for a rush job or provide a discount if a customer is unhappy with the result. Finally, Cody and John budget $2,000 per month for fixed costs such as office rent, phones, advertising, and the company car.

For this past month (October), College Painters earned $25,333 in revenues for several different jobs totaling 24,000 sf. College Painters used 72 gallons and 765 hours of labor during the month. The 765 hours of labor cost $11,475, which includes the 32 hours it took to clean up the mess in a customer’s home because a painter accidentally tripped over a full can of paint.

According to their paint supply store, they spent $2,160 on paint and $480 on supplies during the month. The bill for paint for October was higher than normal because Cody and John decided to try a newer, more expensive paint in the hope that it would lead to improved paint and labor efficiencies. They did not think this would affect the amount of supplies used). Finally, they spent $2,250 on fixed costs during October.

5-4.    Did switching paint increase College Painters’ profit for October? Which variances help you in assessing the quality of this decision?

Materials (paint)

1.6 gallons @ $25.00 per gallon

Materials (supplies)

$10.00

Labor (includes surface prep and applying the paint and faux finish)

16 hours @ $15.00 per hour

Explanation / Answer

Switching the paint used is likely to affect following 3 variances.

1) Paint price variance,

2) Paint quantity variance, and

(3) Labor quantity variance

So, the decision to change paint will increase College Painters’ August profit by $525 + $145 – $355 = $315.

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