Deli One operates a chain of 10 hospitals in the Los Angeles area. Its central food-catering facility, Deliman, prepares and delivers meals to the hospitals. It has the capacity to deliver up to 1,225,000 meals a year. In 2014, based on estimates from each hospital controller, Deliman budgeted for 980,000 meals a year. Budgeted fixed costs in 2014 were $1,519,000. Each hospital was charged $6.25 per meal -- $4.70 variable costs plus $1.55 allocated budgeted fixed cost.

Recently, the hospitals have been complaining about the quality of Deliman's meals and their rising costs. In mid-2014, Deli One's president announces that all Deli One hospitals and support facilities will be run as profit centers. Hospitals will be free to purchase quality-certified services from outside the system. Ron Smith, Deliman's controller, is preparing the 2015 budget. He hears that three hospitals have decided to use outside suppliers for their meals, which will reduce the 2015 estimated demand to 775,000 meals. No change in variable cost per meal or total fixed costs is expected in 2015.

	2014 Master	Practical	2015 Master
	Budget	Capacity	Budget
Budgeted fixed costs per meal	$1.55	$1.24	$1.96

1.) Recall that Deliman uses the master-budget capacity utilization to allocate fixed costs and to price meals. What was the effect of production-volume variance on Deliman's operating income in 2015?

			Fixed cost allocated using master-budget capacity				Production-
	Bud. fixed costs	- (	Bud. fixed cost per meal	x	Capacity level meals	) =	volume variance
		- (		x		) =

2.) Why might hospital controllers deliberately overestimate their future meal counts?

Total budgeted fixed costs / Capacity level meals = Fixed cost per meal

Allocated / =

Budgeted / =