Question: “Ice Storm”

In March, a devastating ice storm struck Monroe County New York, causing millions of dollars of damage. Mathews& Peat a large horticultural nursery was hit hard. As a result of the storm $635,000 of additional labor and maintenance costs were incurred to clean up the nursery remove and replace damaged plants, repair fencing and replace glass broken when nearby tree limbs fell on some of the greenhouse.

M&P is a wholly owned subsidiary of Agro Inc., an international agricultural conglomerate. The manager of M&P R Dye is reviewing the operating performance of the subsidiary for the year. Here are the results for the year as compared with budget:

MATHEWS& PEAT: Summary of operating results for the current year ($000s)

Revenues $32,149 $31,682 101%

Less

Labor 13,152 12,621 104

Materials 8,631 8,139 106

Occupancy costs 4,234 4,236 100

Depreciation 2,687 2,675 100

Interest 1,875 1,895 99

Operating Profits $1,570 $2,116 74%

After thinking about how to present the performance of M&P for the year Dye decides to break out the costs of the ice storm from the individual items affected by it and report the storm separately. The total cost of the ice storm, $653,000 consist of additional labor costs of $320,000, additional materials of $220,000 and additional occupancy costs of $113,000. These amounts are net of the insurance payments received due to the storm. The alternative performance statement follows:

MATHEWS & PEAT

Actual results budgeted results actual as % of budget

Revenues $32,149 $31,682 101%

Less

Labor 12,832 12,621 102

Materials 8,411 8,139 103

Occupancy costs 4,121 4,236 97

Depreciation 2,687 2,675 100 Interest 1,875 1,895 99

Operating Profits

Before storm costs 2,233 2,116 105%

Operating profits

a. Put yourself in dye’s position and write a short concise cover memo for the second operating statement summarizing the essential points you want to communicate to your superiors.

b. Critically evaluate the differences between the two performance reports as presented.