Fred bakes cakes. His budget indicates that he will produce and sell 1,000 cakes during March at a selling price of £15 each. At the end of March he calculates that his selling price was £15.50 for each cake produced and sold and that he has generated £14,725 in sales. His standard cost card for each cake shows that his variable cost of production is £6 per cake.

Required

Calculate for Fred for March:

(a) The sales price variance

(b) The sales volume variance

State whether the variances are favourable or unfavourable. Assuming that Fred’s actual production costs are £6 per cake, prove that the sales price and sales volume variances explain fully his additional contribution for March.