Suppose a chain of KFC franchises in Beijing had budgeted sales for 2010 of RMB7.3 million (where RMB stands for the Chinese unit of currency, officially the renminbi, also called the yuan). Cost of goods sold and other variable costs were expected to be 60 percent of sales. Budgeted annual fixed costs were RMB1.8 million. A thriving Chinese economy caused actual 2010 sales to soar to RMB9.2 million and actual profits to increase to RMB1,570,000. Fixed costs in 2010 were as budgeted. The franchisee was pleased with the increase in profit. 

1. Compute the sales-volume variance and the flexible-budget variance for income for 2010. What can the franchisee learn from these variances? 

2. Suppose that in 2011 the Chinese economy weakened, and the franchise’s sales fell back to the RMB7.3 million level. Given what happened in 2010, what do you expect to happen to profits in 2011?