Question
Paynesville Corporation manufactures and sells a preservative used in food and drug manufacturing. The company carries no inventories. The master budget calls for the company
Paynesville Corporation manufactures and sells a preservative used in food and drug manufacturing. The company carries no inventories. The master budget calls for the company to manufacture and sell 128,000 liters at a budgeted price of $285 per liter this year. The standard direct cost sheet for one liter of the preservative follows.
Direct materials | (2 pounds @ $18) | $ | 36 | |
Direct labor | (0.5 hours @ $52) | 26 | ||
|
Variable overhead is applied based on direct labor hours. The variable overhead rate is $160 per direct-labor hour. The fixed overhead rate (at the master budget level of activity) is $80 per unit. All non-manufacturing costs are fixed and are budgeted at $2.6 million for the coming year.
At the end of the year, the costs analyst reported that the sales activity variance for the year was $858,000 unfavorable.
The following is the actual income statement (in thousands of dollars) for the year.
Sales revenue | $ | 35,098 | |
Less variable costs | |||
Direct materials | 3,718 | ||
Direct labor | 1,150 | ||
Variable overhead | 1,070 | ||
Total variable costs | $ | 5,938 | |
Contribution margin | $ | 29,160 | |
Less fixed costs | |||
Fixed manufacturing overhead | 1,190 | ||
Non-manufacturing costs | 1,370 | ||
Total fixed costs | $ | 2,560 | |
Operating profit | $ | 26,600 | |
|
Required:
Prepare a profit variance analysis.
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