Black Tyres (BT) manufactures and sells two products in Australia: low-budget tyres and high performance tyres. Low-budget tyres are made from hard rubber for durability while high performance tyres are made from softer rubber for superior grip in wet conditions. When the low-budget model was introduced in the market, another competitor from India introduced low priced tyres with almost alike features. Due to this, the Sales Director decides to reduce the price of low-budget tyres so that sales do not get hurt. At the same time, the sales director decided to run a marketing campaign demonstrating the benefits of high performance tyres and promoting the brand to the top-segment customers. The campaign focused on unique features and safety of high-performance tyres. The market is growing by about 0.8% per year, with strong competition due to tyres imported from India. The CFO, Peter Srock, has provided extracts from last years actual income statement and profit plan. When Peter prepared the budget in November 2017, he expected and assumed that the market would grow by 0.80% compared to the previous year. When he received the Annual Tyre Industry Report, he found that the market actually grew by 0.75%.

Discuss and analyse sales price and sales volume variances that you have calculated. Are they favourable or unfavourable? What are the drivers of these variances?

Black Tyres Income Statement Year Ended 30 June 2018 variance (384) total variance 244 56 sales revenue variable costs contribution margin non-variable costs net operating profit (384) variance 628 (440) 188 $ 000 s'000 $'000 $ 000 $'000 budget 30,018 (21,012) 9,005 (568) 8,437 flexible budget 30,646 (21,452) 9,194 (568) 8,626 actual 30,262 (21,396) 8,865 (558) 8,307 (140) (328) 10 (318) 188 (130) (9,642) 205,000 86.460 (60.522) 195,358 86.460 (60.522) 25.938 (1.721) (0.720) (2.441) 195,358 84.739 (61.242) 23.497 (1.721) (0.720) (2.441) 25.938 11,595 Product Breakdown Low-budget Tyre sales volume tyres selling price S per tyre variable costs S per tyre contribution margin S per tyre High-performance Tyre sales volume tyres selling price S per tyre variable costs S per tyre contribution margin Sper tyre Both Products Combined sales volume tyres market share selling price S per tyre variable costs S per tyre contribution margin S per tyre 97,500 126.087 (88.261) 37.826 109,095 126.087 (88.261) 37.826 (0.441) 1.801 1.360 109,095 125.646 (86.460) 39.186 (0.441) 1.801 1.360 302,500 5.185% 99.232 (69.463) 29.770 1,953 0.036% 1.427 (0.999) 0.428 304,453 5.221% 100.660 (70.462) 30.198 (1.262) 0.183 (1.079) 304,453 5.221% 99.397 (70.278) 29.119 0.165 (0.816) (0.651) Black Tyres Reconciliation Year Ended 30 June 2018 $'000 $1000 $'000 8,437 188 84) Planned net operating profit market size variance market share variance product mix variance volume variance price variance variable cost variance non-variable cost variance price/cost variance Total variance rounding error Actual net operating variance (318) (130) (0) 8,307 Black Tyres Income Statement Year Ended 30 June 2018 variance (384) total variance 244 56 sales revenue variable costs contribution margin non-variable costs net operating profit (384) variance 628 (440) 188 $ 000 s'000 $'000 $ 000 $'000 budget 30,018 (21,012) 9,005 (568) 8,437 flexible budget 30,646 (21,452) 9,194 (568) 8,626 actual 30,262 (21,396) 8,865 (558) 8,307 (140) (328) 10 (318) 188 (130) (9,642) 205,000 86.460 (60.522) 195,358 86.460 (60.522) 25.938 (1.721) (0.720) (2.441) 195,358 84.739 (61.242) 23.497 (1.721) (0.720) (2.441) 25.938 11,595 Product Breakdown Low-budget Tyre sales volume tyres selling price S per tyre variable costs S per tyre contribution margin S per tyre High-performance Tyre sales volume tyres selling price S per tyre variable costs S per tyre contribution margin Sper tyre Both Products Combined sales volume tyres market share selling price S per tyre variable costs S per tyre contribution margin S per tyre 97,500 126.087 (88.261) 37.826 109,095 126.087 (88.261) 37.826 (0.441) 1.801 1.360 109,095 125.646 (86.460) 39.186 (0.441) 1.801 1.360 302,500 5.185% 99.232 (69.463) 29.770 1,953 0.036% 1.427 (0.999) 0.428 304,453 5.221% 100.660 (70.462) 30.198 (1.262) 0.183 (1.079) 304,453 5.221% 99.397 (70.278) 29.119 0.165 (0.816) (0.651) Black Tyres Reconciliation Year Ended 30 June 2018 $'000 $1000 $'000 8,437 188 84) Planned net operating profit market size variance market share variance product mix variance volume variance price variance variable cost variance non-variable cost variance price/cost variance Total variance rounding error Actual net operating variance (318) (130) (0) 8,307