Question 4 Sales Volume Variances (21 marks) Sally Jones is the CEO of Office Comfort Corporation (OCC). The company manufactures two computer desks, the basic and the deluxe. She has just received the latest industry statistics, which indicate that industry sales for computer desks were 8% higher than the company had forecast when developing this year's budget. The industry numbers were a pleasant surprise for Sally. "If we maintain our market share, then I suspect we will have had a good year, surpassing our expectations." OCC anticipated combined sales volume of 50,000 units, for the basic computer desk and the deluxe computer desk, when it developed the current year budget. The basic computer desk had typically accounted for 75% of the company's sales in the past and Sally had used that percentage in calculating the current year's budget, although he was hopeful that the deluxe computer desk's proportion would grow. In the budget, the basic computer desk had a unit selling price of $80.00. Variable manufacturing costs were budgeted at $40.00 per unit. The only variable operating cost was a commission of 5% of the unit selling price that was paid to the sales representatives. The deluxe computer desk included some premium features that allowed the company to sell the unit for $115.00. The variable manufacturing costs were 15% higher than the basic computer desk and the sales commission remained at 5% of the unit selling price. The market for the basic computer desk turned out to be very competitive. The sales manager lowered the unit selling price so that the average selling price for the year was $78.00. Revenue for the basic computer desk totaled $2,730,000. Variable manufacturing costs were slightly higher than expected and averaged $42.00 per unit. To stimulate sales of the deluxe computer desk, OCC dropped the selling price by $5.00 per unit. The price decline resulted in a 5% increase in sales volume over the budget. Variable manufacturing costs remained close to budget throughout the entire year. OCC is now finalizing the financial statements for the year. Based upon the information presented above, Sally has asked you to prepare an analysis of OCC's profitability for the year. In addition to the information already provided, Sally mentioned that fixed manufacturing overhead costs of $ 400,000 were $50,000 less than anticipated in the budget. Fixed operating expenses of $250,000 were exactly on budget. The company does not allocate fixed costs between products as any allocation would be meaningless. Anticipated industry volume was 275,000 units per year. Required: 1. What was the budgeted operating income for the current year? (4 marks) 2. What was the actual operating income for the current year? (3 marks) 3. Prepare a variance analysis from the information provide by calculating the following variances:3. Prepare a variance analysis from the information provide by calculating the followin variances: a. Flexible budget variance for both products. (2 marks) b. Sales volume variance for both products. (2 marks) c. Sales quantity variance for both products. (2 marks) d. Mix variance for both products. (2 marks) 4. Calculate the market size and market share variance for the computer desks. (4 marks) 5. Did the company realize any of the expectations mentioned by the CEO? Explain. (2 marks)
