David Catrow is the manufacturing production supervisor for Faraday Motor Works (FMW), a company that manufactures electrical motors for industrial applications. Trying to explain why he did not get the year-end bonus that he had expected, he told his wife, This is the dumbest place I've ever worked. Last year the company set up this budget assuming it would sell 150,000 units. Well, it sold only 140,000. The company lost money and gave me a bonus for not using as much materials and labor as was called for in the budget. This year, the company has the same 150,000 units goal and it sells 160,000. The companys making all kinds of money. Youd think Id get this big fat bonus. Instead, management tells me I used more materials and labor than was budgeted. They said the company would have made a lot more money if Id stayed within my budget. I guess I gotta wait for another bad year before I get a bonus. Like I said, this is the dumbest place I've ever worked.

FMWs master budget and the actual results for the most recent year of operating activity follow:

	Master Budget	Actual Results	Variances	F or U
Number of units	150,000	160,000	10,000
Sales revenue	$33,000,000	$35,520,000	$2,520,000	F
Variable manufacturing costs
Materials	(4,800,000)	(5,300,000)	500,000	U
Labor	(4,200,000)	(4,400,000)	200,000	U
Overhead	(2,100,000)	(2,290,000)	190,000	U
Variable selling, general, and admin. costs	(5,250,000)	(5,450,000)	200,000	U
Contribution margin	16,650,000	18,080,000	1,430,000	F
Fixed costs
Manufacturing overhead	(7,830,000)	(7,751,000)	79,000	F
Selling, general, and admin. costs	(6,980,000)	(7,015,000)	35,000	U
Net income	$ 1,840,000	$ 3,314,000	$1,474,000	F

Required

1. Did FMW increase unit sales by cutting prices or by using some other strategy?
2. Is Mr. Catrow correct in his conclusion that something is wrong with the companysperformance evaluation process? If so, what do you suggest be done to improve the system?
3. Prepare a flexible budget and recompute the budget variances.
4. Explain what might have caused the fixed costs to be different from the amount budgeted.
5. Assume that the companys materials price variance was favorable and its materials usage variance was unfavorable. Explain why Mr. Catrow may not be responsible for these variances. Now, explain why he may have been responsible for the materials usage variance.
6. Assume the labor price variance is unfavorable. Was the labor usage variance favorable or unfavorable?
7. Is the fixed cost volume variance favorable or unfavorable? Explain the effect of this variance on the cost of each unit produced.