3) Report to the CEO of State of The Art Inc.

(SOTA Inc)

Sales Variances and explanations for the third quarter of 2018

There was a shortfall in the Contribution Margin amounting to $1,107,000 that is attributable to
sales, costs and related activities during the third quarter. The shortfall is interpreted and
explained below by using Variance Analysis at various levels.

Although the company sold more units than what they originally budgeted for, the variance in
the selling price and variable cost caused an unfavourable reduction in revenue amounting to
$286,000. (Budgeted Revenue minus Actual Revenue).

Variance from and effect of changes in the total quantity sold:

SOTA Inc sold 10,000 units more than what was originally budgeted for. However, the
market on a whole grew by 25% during the third quarter (i.e: from 400,000 tablets to
500,000 tablets). In keeping up with the assurance that the company would still keep its
budgeted market share (25%), the company had to sell 125,000 units. Since the
company did not meet this target, its market share dropped to 22%.

Variances arising from changes in the mix of products sold:

The company had originally planned a product mix of 12.5|37.5|50 for SlatePro, Slate
and SlateLite respectively but the actual mix turned out to be 10|40|50. The
unfavourable variance in the mix for SlatePro resulted in a shortfall of $541,750 and the
favourable variance in Slate resulted in $470,250.

In addition to the variations caused by total quantity and the mix of products, price and cost
variances also negatively impacted the company’s revenue.

To summarise:
Benefit from increased sales quantity (10,000 * 130.75) = 1,307,500
TOTAL BENEFIT = 1,307,500
Losses from Mix Variance (470,250 – 541,750) = 71,500
Losses from changes in selling price = 2,211,000
Losses from changes in variable cost = 132,000
TOTAL LOSSES = 2,414,500

COMBINED TOTAL (2414500 – 1307500) = $1,107,000

4) In analysing the company’s product mix, SlateLite comprises of 50% of its sales, however its
contribution margin is only $29 per unit while its variable cost is high. i.e: $73. The contribution margins
of the other 2 products are almost 500% more than the Contribution margin of SlateLite. In tune to this,
the company should try to reduce the cost of this product or consider outsourcing its manufacturing if it
falls cheaper.

According to current global market trends, sales of tablets have been declining by approximately 5% per
quarter but the last quarter of this year, sales have dropped by 13.5%. As per the indication of tablet
trends, the market for detachable tablets seems to have potential and so SOTA Inc should consider
creating a like product and capturing this segment of the market especially since sales of tablets on the
whole are declining.