Rainbow Company processes potatoes into a variety of different types of cut chips such as thin cut or original cut. The company can sell its output at $200 per ton of potatoes processed. The following budgeted and actual data has been prepared for the year ending 31 December 2019.

Management is disappointed that the actual profit showed only a small increase when compared with the budgeted profit. They had expected better results from the large increase in sales and their careful monitoring of production costs.

Required:

(a) Prepare a flexed budget for the year ended 31 December 2019 based on sales and production of 6,500 tons and calculate the overall budget variance, sales volume variance, and individual flexed variances; indicating whether each variance is favourable (F) or adverse (A). (7 marks)

(b) Suggest two possible explanations for the significant variances. (2 marks max 50 words) (Total for question: 9 marks)

Budgeted data 5,800 $1,160,000 Actual data 6,500 $1,235,000 Volume processed and sold Sales revenue Less: Costs: Variable production Fixed production Variable marketing Fixed marketing and administrative Profit 568,400 220,000 127,600 185,000 $59.000 598,000 215,000 130,000 220,000 $72.000