Cost allocation, responsibility accounting, ethics (continuation of 9-39). In 2013, only 760,500 Mealman meals were produced and sold to the hospitals. Smith suspects that hospital controllers had systematically inflated their 2013 meal estimates.

Required

1. Recall that Mealman uses the master-budget capacity utilization to allocate fixed costs and to price meals. What was the effect of production-volume variance on Mealman’s operating income in 2013?

2. Why might hospital controllers deliberately overestimate their future meal counts?

3. What other evidence should Cayzer’s president seek to investigate Smith’s concerns?

4. Suggest two specific steps that Smith might take to reduce hospital controllers’ incentives to inflate their estimated meal counts.