Comprehensive variance analysis Sol Electronics, a fast-growing electronic device producer, uses a standard costing system, with standards set at the beginning of each year. In the second quarter of 2011, Sol faced two challenges: It had to negotiate and sign a new short-term labor agreement with its workers' union, and it also had to pay a higher rate to its suppliers for direct materials. The new labor contract raised the cost of direct manufacturing labor relative to the company's 2011 standards. Similarly, the new rate for direct materials exceeded the company's 2011 standards. However, the materials were of better quality than expected, so Sol's management was confident that there would be less waste and less rework in the manufacturing process. Management also speculated that the per-unit direct manufacturing labor cost might decline as a result of the materials' improved quality. At the end of the second quarter, Sol's CFO, Terence Shaw reviewed the following results: Variable Costs Per Unit Per Unit Variable Cost Standard First Quarter 2011 Second Quarter 2011 Actual Results Actual Results Direct materials 2.2 lb. at $5.70 per lb. $12.54 2.3 lb. at $5.80 per lb. $13.34 2.0 lb. at $6.00 per lb. $12.00 Direct manufacturing labor 0.5 hrs. at $ 12 per hrs. $ 6.00 0.52 hrs. at $ 12 per hrs. $ 6.24 0.45 hrs. at $ 14 per hrs. $ 6.30 Other variable costs $10.00 $10.00 $ 9.85 $28.54 $29.58 $28.15 Static Budget for First Quarter Second Quarter Each Quarter 2011 Results 2011 Results Based on 2011 Units 4,000 4,400 4,800 Selling price $ 70 $ 72 $ 71.50 Sales $280,000 $316,800 $343,200 Variable costs Direct materials 50,160 58,696 57,600 Direct manufacturing labor 24,000 27,456 30,240 Other variable costs 40,000 44,000 47,280 Total variable costs 114,160 130,152 135,120 Contribution margin 165,840 186,648 208,080 Fixed costs 68,000 66,000 68,400 Operating income $ 97,840 $120,648 $139,680 Shaw was relieved to see that the anticipated savings in material waste and rework seemed to have materialized. But, he was concerned that the union would press hard for higher wages given that actual unit costs came in below standard unit costs and operating income continued to climb. 1. detailed variance analysis of the second quarter results relative to the static budget. Show how much of the improvement in operating income arose due to changes in sales volume and how much arose for other reasons. Calculative variances that isolate the effects of price and usage changes in direct materials and direct manufacturing labor. Make sure you break down your variance analysis into Level 1, 2, 3 and make sure you identify and disaggregate all variances to the extent possible. 2. Use the results of requirement 1 to rebuttal to the union's anticipated demands in light of the second quarter results. 3. Terence Shaw thinks that the company can negotiate better if it changes the standards. Without performing any calculations, discuss the pros and cons of immediately changing the standards. Please report answering all three questions. Your report may be typed, or handwritten and scanned, but if writing you must be neat and legible. Please attach your variance analysis and any other calculations as exhibits.