Suppose a McDonald’s franchise in Bangkok had budgeted sales for 2006 of B7.5 million (where B stands for baht, the Thai unit of currency). Cost of goods sold and other variable costs were expected to be 70 percent of sales. Budgeted annual fixed costs were B1.8 million. A booming Thai economy caused actual 2006 sales to soar to B9.3 million and actual profits to increase to B600,000. Fixed costs in 2006 were as budgeted. The franchisee was pleased with the/increase in profit.
1. Compute the sales activity variance and the flexible budget variance for 2006. What can the franchisee learn from these variances?
2. In 2007 the Thai economy plummeted, and the franchise’s sales fell back to the B7.5 million level. Given what happened in 2006, what do you expect to happen to profits in 2007?