ReelTime distributes DVDs to movie retailers. ReelTime$$s top management meets monthly to evaluate the company$$s performance. Controller Jairo Munoz prepared the following performance report for the meeting.

REELTIME, INC.

Income Statement Performance Report

Month Ended July $31$

Actual Results

Static Budget

Variance

Sales revenue

$$1,640,000$

$$1,960,000$

$$320,000$ U

Variable expenses:

$$Cost of goods sold

$773,750$

$980,000$

$206,250$F

$$Sales commissions

$77,375$

$107,800$

$30,425$F

$$Shipping expense

$42,850$

$53,900$

$11,050$F

Fixed expenses:

$$Salary expense

$311,450$

$300,500$

$10,950$ U

$$Depreciation expense

$208,750$

$214,000$

$5,250$F

$$Rent expense

$128,250$

$108,250$

$20,000$ U

$$Advertising expense

$81,100$

$68,500$

$12,600$ U

Total expenses

$1,623,525$

$1,832,950$

$209,425$F

Operating income

$$16,475$

$$127,050$

$$110,575$ U

Munoz also revealed that the actual sales price of $$20$ per movie was equal to the $$budgeted sales price and that there were no changes in inventories for the month.

Management is disappointed by the operating income results. CEO Philippe Gollin exclaims, $$How can actual operating income be roughly $13\%$ of the static budget amount when there are so many favourable variances?$$

Requirements

Prepare a more informative performance report. Be sure to include a flexible budget for the actual number of DVDs bought and sold.

As a member of ReelTime$$s management team, which variances would you want investigated? Why?

Gollin believes that many consumers are postponing purchases of new movies until after the introduction of a new format for recordable DVD players. In light of this information, how would you rate the company$$s performance?