Subs catering operates a chain of 10 hospitals in the Los Angeles area. Its central food-catering facility, Subman, prepares and delivers meals to the hospitals. It has the capacity to deliver up to 1,380,000 meals a year. In 2017, based on estimates from each hospital controller, Subman budgeted for 920,000 meals a year. Budgeted fixed costs in 2017 were $1,518,000. Each hospital was charged $5.85 per meal$4.20 variable costs plus $1.65 allocated budgeted fixed cost.

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Recently, the hospitals have been complaining about the quality of Subman's meals and their rising costs. In mid-2017, Subs Catering's president announces that all Subs Catering hospitals and support facilities will be run as profit centers. Hospitals will be free to purchase quality-certified services from outside the system. Luke Callahan, Subman's controller, is preparing the 2018 budget. He hears that three hospitals have decided to use outside suppliers for their meals, which will reduce the 2018 estimated demand to 825,000 meals. No change in variable cost per meal or total fixed costs is expected in 2018.

Reference

	2017 Master	Practical	2018 Master
	Budget	Capacity	Budget
Budgeted fixed costs per meal	$1.65	$1.10	$1.84

In 2018, only 690,000 Subman meals were produced and sold to the hospitals. Callahan suspects that hospital controllers had systematically inflated their 2018 meal estimates.

Requirements

1.	Recall that Subman uses the master-budget capacity utilization to allocate fixed costs and to price meals. What was the effect of production-volume variance on Subman's operating income in 2018?
2.	Why might hospital controllers deliberately overestimate their future meal counts?
3.	What other evidence should Subs Catering's president seek to investigate Callahan's concerns?
4.	Suggest two specific steps that Callahan might take to reduce hospital controllers' incentives to inflate their estimated meal counts.