Problem:

Appliance company produces fans. The director prepared a master budget based on sales level of 19,500 fans for the month of March. Below is the budgeted income statement for the period:

Budgeted Income Statement

Revenue

$3,120,000

Variable expenses

Direct materials

$877,500

Direct labor

390,000

Variable overhead

585,000

Total variable expenses

1,852,500

Contribution margin

1,267,500

Fixed overhead

325,000

Fixed selling and administrative expenses

650,000

Total fixed expenses

975,000

Operating income

$ 292,500

During March, Appliance sold 23,400 fans and had the following actual results:

Actual Income Statement

Revenue

$3,731,000

Variable expenses

Direct materials

$1,037,400

Direct labor

487,500

Variable overhead

715,000

Total variable expenses

2,239,900

Contribution margin

1,491,100

Fixed overhead

351,000

Fixed selling and administrative expenses

650,000

Total fixed expenses

1,001,000

Operating income

$ 490,100

Required:

a. flexible budget for March.

b. Calculate Appliance's static budget variance for March.

c. Will the static budget variance that you calculated in part (b) be useful to management? Why or why not?

d. Based on the available information, performance report for management including flexible budget variance and sales volume variance.

e. Comment on the results of your report.

f. Suppose that Appliance company has decided to outsource one of its activities because salaries and cost of employee benefits increased. As director of the team responsible for determining the best activity to be outsourced, what must you say to the CEO when meeting with him, explaining why your team chose to outsource the payroll function. Explain to the CEO the impacts of your team's decision on the business (use examples and you can assume any missing information you need to explain).