St. Mary Electronic Inc. is a firm manufacturing specialized electronic chips. The firm adopts a zero inventory policy, which means that production volume always equals sales volume.

The budgeted annual production of electronic chips for 2020 were 124,000 units with a budgeted selling price of $4 each unit. The budgeted usage of electronic components (direct material) was 2 units to manufacture one unit of electronic chip; the budgeted material cost for each electronic component was $1.70.

The actual costs and revenue for the electronic chips in 2020 were as follows:

Production and sales volume of electronic chips	119,000 units
Selling price per unit for electronic chip	$4.00
Material cost for electronic component per unit	$1.50
Amount of electronic components used	270,000 units

Required

a) What is the firms budgeted direct material cost under the static budget and flexible budget respectively? (4 marks)

b) Calculate the price variance, efficiency variance, sales-volume variance, and static-budget variance for direct material. (8 marks)

c) The production manager of St. Mary Electronic Inc. claims that he should be awarded a bonus based on the favourable static-budget product cost variance, which indicates his superior performance in achieving efficient production. Do you agree with his claim? Please use the direct material variance calculated above to justify your answer. Please suggest the possible reasons for the price variance and efficiency variance. (8 marks)