In 1985, Juan Caron, Sr established Scooter's Inc. to provide scooters for tourist destinations in the United States.After his father's retirement in 2017, Juan, Jr (Junior) assumed control of the company.In 2018, Junior expected the company's operating income to increase after they stopped paying his dad's salary of $125,000.After Junior's first in charge, he was dismayed.Inexplicably, the company's operating income decreased.As Junior's accountant, you prepared operating income reconciliation from 2017 to 2018.In preparation an upcoming meeting with Junior, you need to determine potential reasons why operating income decreased.

Scooter, Inc. - Operating Income Reconciliation 2017 to 2018

Difference

Operating Income 2017 $1,857,600

Total Sales Mix Variance $(591,600)

Manf. Variances:

Direct Materials Variance

Price ($256,000)

Efficiency ($22,000)

Direct Labor Variance

Rate ($37,850)

Efficiency ($2,775)

Variable Overhead Variance

Spending ($30,600)

Total Manf. Variances ($349,225)

Selling and General Administration 125,000

Operating Income $1,041,775

Scooter's Inc. Summary of Standard Costs

Summary of Standard Costs DeluxeBeginner

Assembly kit per scooter $400 200

Direct labor hours per scooter 3 1

Direct labor rate per hour $25 $15

Variable overhead rate per scooter $35 $35

Sales Price 2017 2018

Deluxe $900 $900

Beginner 350 350

Sales Mix Percent 2017 2018

Deluxe 80% 50%

Beginner 20% 50%

Total Assembled and Sold 6,800 6,800

Scooter Inc - Summary of Actual Costs

Deluxe 2017 2018

Assembly Kits: Used 5,440 3,425

Price per kit $400 $500

Direct Labor Hours 16,320 10,275

Direct Labor Rate per hour $25 $27

Variable overhead per scooter 35 $38

Beginner 2017 2018

Assembly Kits: Used 1,360 3,460

Price per kit $200 $175

Direct Labor Hours 1,360 3,460

Direct Labor Rate per hour $15 $20

Variable overhead per scooter $35 $41

Director salaries $400,000 $275,000

WHAT TO DO:

Analyze each variance on the income reconciliation schedule with explanations supported by calculations. Why did the variances occur based on Scooter's business circumstances? What are some reasons based on the numbers and Scooter's business model (vacation scooters).

I need to include headings for sales mix, direct materials, direct labor, variable overhead & selling and general administration.

I also need detailed numbers in the schedule of standard and actual costs for the deluxe and beginner scooters and calculations to support my conclusion.

**Hint:To calculate the sales mix variance compare the contribution margin at standard units sold between 2017 & 2018(e.g. contribution margin per unit multiplied by units sold).

I need to includethree recommendations for Junior on how to improve Scooter's operating income.Because of the company's competitive situation, price changes are not a viable recommendation.