In 2018, only 740,000 TopStuff meals were produced and sold to the hospitals. Smith suspects that hospital controllers had systematically inflated their 2018 meal estimates.

1. Recall that TopStuff uses the master-budget capacity utilization to allocate fixed costs and to price meals. What was the effect of production-volume variance on TopStuff’s operating income in 2018?

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

3. What other evidence should Top Catering’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.