David Catrow is the manufacturing production supervisor for Perez Motor Works, 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 130,000 units. Well, it sold only 120,000. 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 130,000 units goal and it sells 141,000. 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.

Perezs 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	130,000				141,000				11,000
Sales revenue	$	29,900,000			$	32,853,000			$	2,953,000		F
Variable manufacturing costs
Materials		(4,030,000	)			(4,406,250	)			376,250		U
Labor		(3,900,000	)			(4,193,340	)			293,340		U
Overhead		(1,560,000	)			(1,708,920	)			148,920		U
Variable selling, general and administrative costs		(4,290,000	)			(4,620,570	)			330,570		U
Contribution margin		16,120,000				17,923,920				1,803,920		F
Fixed costs
Manufacturing overhead		(7,810,000	)			(7,710,000	)			100,000		F
Selling, general and administrative costs		(7,704,000	)			(7,814,000	)			110,000		U
Net income	$	606,000			$	2,399,920			$	1,793,920		F

Required

c. Prepare a flexible budget and recompute the budget variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

	Flexible Budget	Actual Results	Variances
Number of Units		141,000
Sales revenue		$32,853,000
Variable manufacturing costs
Materials		(4,406,250)
Labor		(4,193,340)
Overhead		(1,708,920)
Variable Selling, general & administrative		(4,620,570)
Contribution margin		17,923,920
Fixed costs
Manufacturing overhead		(7,710,000)
Selling, general & administrative		(7,814,000)
Net income		$2,399,920