ACCT640 – Managerial Accounting 2013/14 Case #3 – Performance Drinks - A further study of: Regression Analysis Contribution Margin Reporting Cost-Volume-Profit Analysis Differential Analysis Capital Budgeting Written by: Tim Bergsma, CMA, CFE Assistant Professor – Accounting Davenport University Donald W. Maine – College of Business Background: Performance Drinks, LLC is owned by Dave N. Port. Performance Drinks produces a variety of sports centered drinks. They began operations in 1993 shortly after Mr. Port graduated with his M.B.A. from Davenport University. The company saw early success as sports and fitness nutritional products gained new popularity in the 1990’s. Financially the company is sound and has been wise in controlling their growth over the years. However, within the last 18 months Mr. Port has noticed a drop in overall company profitability. This is especially troubling considering that the company has continued to experience top-line growth. Mr. Port and his management team have been considering developing a new product line. However, those plans have been put on hold until they can figure out why their profits are shrinking. Performance Drinks makes four different kinds of sports drinks. Those drinks are as follows: · Basic · Hydration · Intensity · Post-Workout Each of these drinks contains a slightly different nutritional profile and is targeted for different users and uses. The Basic drink has the least nutritional benefit and is targeted for general consumption. The Hydration product targets endurance athletes and specializes in hydration replacement. The Intensity product was designed with energy enhancement in mind. It serves the needs of extreme athletes who need long durations of sustained energy. Lastly, the Post-Workout product is a nutritional replacement product that is generally used following exertion. Information Related to Case #2 (this section is the same as you received when you were assigned Case #2): You are the Controller for Performance Drinks. You feel as though you have a good handle on the financial reporting and the overall company performance. However, admittedly, your accounting information system has been designed to serve the needs of external users from an aggregate perspective. To that end you utilize absorption costing exclusively within the organization. You recall studying the concept of Activity Based Management (ABM) and Activity Based Costing (ABC) while taking a managerial accounting course. You wonder if applying those ideas to your business would help to uncover the mystery of the disappearing profits. You recall from your Management Accounting class that product costs are comprised of: · Direct Materials · Direct Labor · Manufacturing Overhead You don’t suspect that anything strange is going with your direct costs. You do wonder, however, if a more thorough understanding of your indirect costs may be in order. Over a series of weeks you talk with a vari.

1. ACCT640 – Managerial Accounting
2013/14
Case #3 – Performance Drinks - A further study of:
Regression Analysis
Contribution Margin Reporting
Cost-Volume-Profit Analysis
Differential Analysis
Capital Budgeting
Written by:
Tim Bergsma, CMA, CFE
Assistant Professor – Accounting
Davenport University
Donald W. Maine – College of Business
Background:
Performance Drinks, LLC is owned by Dave N. Port.
Performance Drinks produces a variety of sports centered
drinks. They began operations in 1993 shortly after Mr. Port
graduated with his M.B.A. from Davenport University. The
company saw early success as sports and fitness nutritional
products gained new popularity in the 1990’s. Financially the
company is sound and has been wise in controlling their growth
over the years. However, within the last 18 months Mr. Port
has noticed a drop in overall company profitability. This is
especially troubling considering that the company has continued
to experience top-line growth. Mr. Port and his management
team have been considering developing a new product line.
However, those plans have been put on hold until they can

2. figure out why their profits are shrinking.
Performance Drinks makes four different kinds of sports
drinks. Those drinks are as follows:
· Basic
· Hydration
· Intensity
· Post-Workout
Each of these drinks contains a slightly different nutritional
profile and is targeted for different users and uses. The Basic
drink has the least nutritional benefit and is targeted for general
consumption. The Hydration product targets endurance athletes
and specializes in hydration replacement. The Intensity product
was designed with energy enhancement in mind. It serves the
needs of extreme athletes who need long durations of sustained
energy. Lastly, the Post-Workout product is a nutritional
replacement product that is generally used following exertion.
Information Related to Case #2 (this section is the same as you
received when you were assigned Case #2):
You are the Controller for Performance Drinks. You feel as
though you have a good handle on the financial reporting and
the overall company performance. However, admittedly, your
accounting information system has been designed to serve the
needs of external users from an aggregate perspective. To that
end you utilize absorption costing exclusively within the
organization. You recall studying the concept of Activity Based
Management (ABM) and Activity Based Costing (ABC) while
taking a managerial accounting course. You wonder if applying
those ideas to your business would help to uncover the mystery
of the disappearing profits.
You recall from your Management Accounting class that
product costs are comprised of:
· Direct Materials
· Direct Labor
· Manufacturing Overhead
You don’t suspect that anything strange is going with your
direct costs. You do wonder, however, if a more thorough

3. understanding of your indirect costs may be in order. Over a
series of weeks you talk with a variety of employees,
representing a multitude of functional areas, from within the
company. During those conversations you take careful note on
what activities might be consuming resources and how those
activities might be measured. You sharpen your pencil and
begin to unpack what you’ve learned. You start with reviewing
last month’s Product-Level Profit Report. That report is
following:
Since your primary area of focus is on the indirect costs
you compile the following report which further details your
overhead charges:
Overhead Activities:
Using traditional costing methods, which support your
absorption costing system, you base overhead allocation on
direct labor cost. Furthermore, “fringe benefits” are a function
of direct labor cost.
As a result of your many meetings to discuss company overhead
you determine that the majority of your indirect costs are
related to four primary activities. Those activities are
equipment set-ups, production runs, production management and
machine-hour capacity. “Production Management” refers to a
number of items that are correlated to the number of products
the company produces. Ultimately you determine that your key
activities have the following usage patterns, as they pertain to
the monthly overhead costs:
Upon reviewing budget data from the last budget cycle you
discover that the monthly number of set-ups was estimated to be
85. The number of production runs was estimated to be 250.
That monthly machine-hour capacity is presently at 20,000
machine-hours. Lastly, Performance Drinks produces a total of
four products.
After talking with the Plant Manager you create the

4. following usage data relative to products and activities:
New Information Pertaining to Case #3:
The financial reporting to date has been done using absorption
costing. That is to say that the manufacturing costs included
direct materials, direct labor, variable manufacturing overhead
and fixed manufacturing overhead. In this sense the Income
Statements have historically reported Gross Margin. Following
is a Monthly Income Statement, based on absorption costing, for
Performance Drinks:
You begin to wonder if there would be any value in repackaging
the income statement in a way that would report Contribution
Margin as opposed to Gross Margin. You know that in order to
report Contribution Margin you will need to understand your
costs as variable and fixed. Unfortunately the general ledger
does not specifically report costs as variable and fixed. You
remember learning that regression analysis can be used to
generate data that can be used to create a total cost equation.
With the total cost equation we can understand our total cost as
the sum of fixed costs and variable costs. After doing some
research your collect the following data related to overhead and
possible causal factors:
Requirement #1
Using the data above, which has also been provided
electronically in Excel, run the following regression analyses:
· Linear regression analyzing total overhead cost and units sold
· Linear regression analyzing total overhead cost and machine
hours used
· Multiple regression analysis analyzing total overhead cost
along with both units sold and machine hours used
Requirement #2

5. Based on the results from the three regression analyses
determine which correlation provides the best estimate of the
total cost equation. Explain why you selected the correlation
that you did.
Requirement #3
Write out the total cost equation using the results from the
multiple regression test.
Requirement #4
Create a “Contribution” formatted income statement using
the results from the multiple regression test. Use the following
additional information regarding machine hours, used by each
product, which has also been provided in Excel electronically:
Reference the following sales volumes, by product, for your
cost allocation related to units sold:
Use the following template as a guide for the format of your
“Contribution” Income Statement:
Requirement #5
Compute the following:
· Break-even point in units
· Break-even point in sales dollars
· Targeted profit point in units (use $50,000 as your targeted
profit point)
· Margin of Safety
Requirement #6
A new customer has surfaced. That customer has asked
you to consider producing a special one-time order for them.
This special order would require a modification to the recipe
that will slightly increase the variable cost per unit.
Furthermore, there would be a small fixed cost addition. The
details for the order as follows:
Conduct a differential analysis regarding this special order.
Would you accept this order under the conditions provided?

6. Explain and defend your position.
Requirement #7:
Your management team has asked you to consider
investing in a new piece of equipment. The details of that
investment opportunity are following:
The discount rate for this project is 5%. Compute the
following:
· Net Present Value
· Internal Rate of Return
Would you recommend investing in this new piece of
equipment? Explain and defend your position.
Clarification on format and data:
Clear communication and professionalism are important.
Defending your answer with data is important.
· An electronic copy of this Case (this document) is available
within Blackboard. Additionally, an Excel file, containing the
necessary data for the case will be available within Blackboard.
· Create one professional report, in Word, that contains all of
answers. In that report you should clearly label all of your
answers. Make your answers easy to read and find. Imagine
you were giving this report to your boss. Further imagine you
have to lead your boss and the executive team through your
findings. You will then have one Word document as your final
product. You will also have one Excel file.
· Grading is based on both accuracy (see rubric) and your
ability to communicate your answers professionally and clearly.
· Use the following naming structure for your files: last
name_first initial_case3.docx. Of course your Excel file will
have an .xls suffix.
· Double space your report.
· Put good thought into how you organize your Excel document.
Part of your grade will be based upon the usability and layout of
your Excel file. Imagine that have to give the electronic copy of
your Excel file to your boss, or a peer, to work with. Imagine
that you could not coach them at all on how to use your file. Is

7. your file organized and labeled so clearly that anyone could use
it, easily, without instructions from you? You want to strive for
that kind of clarity in your work.
· Your report should have a title page. Use APA 6th edition for
guidance on title pages.
· You will also upload to Blackboard both your Word document
and your Excel file.
Grading Rubric:
Total >>
150
Requirement
Points Possible
Accuracy - Requirement #1 (Regression Analysis)
15
Accuracy - Requirement #2 (Regression Comments)
10
Accuracy - Requirement #3 (Total Cost Equation)
5
Accuracy - Requirement #4 (Income Statement)
25
Presentation - Requirement #4 (Profit Report)
15
Accuracy - Requirement #5 (CVP)
15
Accuracy - Requirement #6 (Differential Analysis)
15
Quality - Requirement #6 (Differential Analysis)
10
Accuracy - Requirement #7 (Capital Budgeting)
10
Quality - Requirement #7 (Capital Budgeting)
10
Quality - Excel File (Organization / Usability)
10
Overall Professionalism
10

8. Notes:
1. "Quality" scoring is based up the comprehensiveness of your
work. Did you answer the questions asked? Are those answers
correct and / or reasonable? Did you defend your answers where
appropriate?
2. "Presentation" scoring is based on how your report/work
reads. Is your work well organized? Did you include all
necessary supporting work? Is your work labeled well?
11
Monthly Profit Report Trad'lPERFORMANCE DRINKS -
MONTHLY PROFIT REPORTBasicHydrationIntensityPost
WorkoutTotalREVENUE Sales$ 125,000$ 120,000$
74,250$ 93,000$ 412,250COSTS Direct Materials$
40,000$ 50,000$ 31,000$ 33,000$ 154,000 Direct Labor$
25,000$ 20,000$ 10,000$ 18,000$ 73,000 Fringe Benefits
on Direct Labor$ 11,250.00$ 9,000.00$ 4,500.00$
8,100.00$ 32,850.00 Manufacturing Overhead$ 43,750.00$
35,000.00$ 17,500.00$ 31,500.00$ 127,750.00 TOTAL
COST$ 120,000.00$ 114,000.00$ 63,000.00$ 90,600.00$
387,600.00GROSS MARGIN$ 5,000.00$ 6,000.00$
11,250.00$ 2,400.00$ 24,650.00GROSS MARGIN
RATIO4.00%5.00%15.15%2.58%5.98%OPERATING
EXPENSES SELLING Sales Salaries$ 4,500.00
Advertising$ 5,000.00 Meal, Travel & Entertainment$

9. 1,500.00 TOTAL SELLING EXPENSE$ 11,000.00GENERAL
& ADMINISTRATIVE EXP. Salaries General Admin$
7,000.00 General Insurance$ 3,000.00 Depreciation - Office
Equipment$ 1,500.00 Utilities - Admin$ 1,000.00 TOTAL
GENERAL & ADMIN EXP.$ 12,500.00TOTAL OPERATING
EXPENSE$ 23,500.00OPERATING INCOME$
1,150.00OPERATING INCOME MARGIN
RATIO0.28%Monthly
Volume:100,00080,00045,00060,000285,000Unit Price:$ 1.25$
1.50$ 1.65$ 1.55$ 1.45Unit Cost:$ 1.200$ 1.425$
1.400$ 1.510$ 1.360
Mfg OHDPERFORMANCE DRINKS - MONTHLY MFG OHD
COST REPORTMonthly ChargeIndirect Labor$
55,000.00Fringe Benefits on Indirect Labor$
24,750.00Utilities$ 5,000.00Processing Equipment -
Depreciation$ 10,000.00Preventative Maintenance$
10,000.00Information Technology$ 23,000.00Total$
127,750.00
OHD BY MONTHYEARMONTHMFG OHDNON MFG
OHDTOTAL OHDUNITS SOLDMACH HOUR
USED2011January$ 101,147.00$ 20,200.00$
121,347.00235,00014,0002011February$ 115,035.00$
20,100.00$ 135,135.00238,00015,0002011March$
104,787.00$ 19,600.00$
124,387.00240,00014,4002011April$ 118,541.00$
19,500.00$ 138,041.00265,00015,6802011May$ 120,031.00$
20,000.00$ 140,031.00266,00017,0002011June$ 125,487.00$
20,400.00$ 145,887.00274,50019,5002011July$ 124,555.00$
20,500.00$ 145,055.00275,00020,0002011August$
130,412.00$ 20,350.00$
150,762.00285,00020,1002011September$ 145,030.00$
20,050.00$ 165,080.00287,00024,0002011October$
128,115.00$ 19,950.00$
148,065.00278,00019,8012011November$ 127,150.00$
20,600.00$ 147,750.00275,00019,9992011December$
126,225.00$ 20,620.00$

10. 146,845.00271,25019,8502012January$ 99,450.00$
20,500.00$ 119,950.00232,00015,0002012February$
111,999.00$ 20,280.00$
132,279.00234,00015,5002012March$ 112,568.00$
20,560.00$ 133,128.00233,00015,5002012April$
108,787.00$ 20,560.00$ 129,347.00231,00014,8502012May$
118,050.00$ 20,158.00$ 138,208.00266,00016,5002012June$
124,532.00$ 20,176.00$ 144,708.00269,00019,5002012July$
131,254.00$ 20,192.00$
151,446.00284,00019,9992012August$ 130,555.00$
20,490.00$ 151,045.00286,00020,0002012September$
149,001.00$ 20,532.00$
169,533.00290,00025,0002012October$ 125,633.00$
20,574.00$ 146,207.00274,50019,8502012November$
124,131.00$ 20,490.00$
144,621.00273,25019,7872012December$ 124,665.00$
20,562.00$ 145,227.00271,45019,899