. Compute flexible budget and sales volume variances (Learning Objective 2)
ReelTime distributes DVDs to movie retailers, including dot-coms. ReelTime’s top management meets monthly to evaluate the company’s performance. Controller Terri Lon prepared the following performance report for the meeting.

Lon also revealed that the actual sales price of $20 per movie was equal to the budgeted sales price and that there were no changes in inventories for the month.
Management is disappointed by the operating income results. CEO Lyle Nesbitt exclaims, “How can actual operating income be roughly 13% of the static budget amount when there are so many favorable variances?”
Requirements 1. Prepare a more informative performance report. Be sure to include a flexible budget for the actual number of DVDs bought and sold.
2. As a member of ReelTime’s management team, which variances would you want investigated? Why?
3. Nesbitt believes that many consumers are postponing purchases of new movies until after the introduction of a new format for recordable DVD players. In light of this information, how would you rate the company’s performance?

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REELTIME, INC. Income Statement Performance Report Month Ended July 31, 2007 Actual Results Static Budget Variance Sales revenue $1,640,000 $1,960,000 $320,000 U Variable expenses: Cost of goods sold Sales commissions 773,750 980,000 206,250 F 77,375 107,800 30,425 F Shipping expense 42,850 53,900 11,050 F Fixed expenses: Salary expense 311,450 300,500 10,950 U Depreciation expense 208,750 214,000 5,250 F Rent expense 128,250 108,250 20,000 U Advertising expense 81,100 68,500 12,600 U Total expenses 1,623,525 1,832,950 209,425 F Operating income $ 16,475 $ 127,050 $110,575 U