Case III . ReelTime distributes DVDs to movie retailers, including dot-coms. ReelTimes top management meets monthly to evaluate the companys performance. Controller Terri Lon prepared the following performance report for the meeting. 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 F Variable Costs: Variable Costs: 773,750 980,000 206,250 F Sales Commissions 77,375 107,800 30.425 F Shipping Expense 42,850 53,900 11,050 F Total Variable Costs 893,975 1,141,700 247,725 F Fixed Costs: 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 Fixed Costs 729,550 691,250 38,300 U Total Expenses 1,623,525 1,832,950 209,425 F Operating Income $ 16,475 $ 127,050 $110,575 U 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 ReelTimes management team, which variances would you want investigated? Why? 3. Nesbit 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 companys performance? Your