#10.Cost Variance Analysis

Scenario

Read the following scenario and complete the questions below.

The entire poultry industry is working hard to keep up with demand, but egg production is falling behind. According to the USDAs Economic Research Service, the price of eggs in the U.S. is expected to rise more than 35 percent in 2018. The cause of this egg price increases? An uptick in foreign demand for US eggs is partly to blame. When the avian influenza devastated Europe this past year, egg suppliers in the U.S. stepped in to help fill the demand in these countries. Another problem arose in late 2017 where some egg supplies were contaminated with a dangerous insecticide, affecting countries including Germany, France and Belgium. With millions of eggs being pulled from the shelves in Europe, US exports of eggs rose 663 percent between 2016 and 2017. Domestic demand has increased as well. In the United States, 2017 saw a 20-year record in egg consumption at 275.2 eggs per person per year. When you multiply that by 325 million Americans, thats a lot of eggs.

Now, consider the commercial use of eggs in the production of grocery items such as bread, ice cream, pasta, cakes and waffles. Lets focus on the Sara Lee All Butter Pound Cake found in the freezer section of your local grocery store. The first ingredient listed on the package is, you guessed iteggs. The pound cake sells for around $3.97 at the grocery store. However, with the price of eggs on the rise, it is likely that $3.97 price may change.

Questions

1. Which of Sara Lees variances will be affected by the increase in egg prices? Why?.
2. Will the increase in egg prices result in favorable or unfavorable variances for Sara Lee? Why?
3. What is Sara Lee likely to do to its standards based on this increase in price and which standards will be impacted?
4. What, if anything, can Sara Lee do to mitigate the impact of the rising cost of eggs on its manufacturing costs?