Subway Sandwiches operates a fast-casual sandwich chain in California. The company's first location, SFO, was opened in 2018. The Sanjose and LA locations followed suit in 2019. Operations are heavily decentralized and store managers are evaluated on their return on investment (ROI) with corporate expecting them to achieve at least a 20% ROI. (As explained below, Subway calculates ROI as the controllable margin of the store in a period divided by the total assets at the end of the period.) The company is considering changing its performance evaluation system to an EVA approach. Data for 2021 is provided below:

Ballard

Greenwood

Bellevue

Total

	Sanjose	SFO	LA	Total
Revenues	$3,683,000	$4,150,000	$3,130,000	$10,963,000
Variable Food Costs	$1,415,504	$1,611,000	$1,264,000	$4,290,504
Gross Profit	2,267,496	2,539,000	1,866,000	6,672,496
Variable Labor Costs	$991,200	$913,000	$688,600	$2,592,800
Variable Advertising (5% of Revenues)	$165,735	$186,750	$140,850	$493,335
Manager Salary	$100,000	$120,000	$132,000	$352,000
Controllable Expenses	1,256,935	1,219,750	961,450	3,438,135
Controllable Margin	1,010,561	1,319,250	904,550	3,234,361
Rent	$350,000	$380,000	$360,000	$1,090,000
General Admin	$500,350	$629,500	$323,900	$1,453,750
Corporate Overhead	$0	$0	$0	$175,000
Total Non-Controllable Expenses	850,350	1,009,500	683,900	2,718,750
Operating Profit	160,211	309,750	220,650	515,611
Interest				270,000
Taxes				49,122
Net income				196,489
Net book value at 2021 year-end:
Current assets	$970,000	$850,000	$600,000	2,420,000
Long-term assets	3,675,000	4,802,000	3,205,000	11,682,000
Total assets	4,645,000	5,652,000	3,805,000	14,102,000
Current liabilities (non-interest bearing)	330,000	265,000	184,000	779,000
Long-term debt	-	-	-	4,500,000
Stockholders' equity				8,823,000
Total liabilities and equity				14,102,000
Weighted average cost of capital (WACC)				8%

The company currently borrows at 6% per year on its long-term debt and pays a 20% tax rate on income.

Ganga, general manager of the San Jose location, knew that morning when she got the call from Peter Buck that his day was going to be a busy one. Peter was asking for explanations for some of the production variances she observed in last year's performance report. She expected Ganga to explain his variances and suggest ways of improving performance and was hoping to receive his report in a few hours.

According to Thrillist, Subway's is the go-to sandwich store in the California. Since its founding in 2018, the fast-casual restaurant only serves two types of sandwiches: the "Surf-n-Turf" which sells for $8.95 and the "Fish-n-Fowl" which sells for $7.50. Currently, it takes 0.15 direct labor hours (9 minutes) to make any of the sandwiches. Ingredient lists from the recipes for the two sandwiches are:

The Fish-n-Fowl:

• 0.25 lbs. of tuna fish salad
• 0.50 lbs. of sliced turkey
• 2 slices of pumpernickel bread

The Surf-n-Turf:

• 0.40 lbs. of sliced roast beef
• 0.35 lbs. of tuna fish salad
• 2 slices of pumpernickel bread

Subway gets all its meats and breads from Luciano's Wholesale Restaurant Supply. The high quality of Luciano's ingredients as well as the unique sandwich recipes are part of what makes Subway so popular.

To assure a steady supply of ingredients, Subway has entered a long-term contract with Luciano where, for a pre-specified, standard cost, Luciano delivers contracted quantities of roast beef, tuna salad, turkey, and pumpernickel bread (there are 25 usable slices in each loaf of bread) at the beginning of each month. In 2021, contracted volumes were based on an estimated demand of 178,000 Fish-n-Fowl and 235,000 Surf-n-Turf sandwiches respectively. Because the contracted amounts are fixed and predictable, Luciano is able to provide an excellent price on the contracted quantities. However, Subway typically pays a slightly higher rate for some ingredient quantities ordered in excess of contract volumes.

Inputs	Pre-specified Standard Cost
Tuna Fish Salad (per lb)	$3.20
Sliced Turkey (per lb)	$2.00
Sliced Roast Beef (per lb)	$3.60
Pumpernickel bread (per loaf)	$5.00
Direct Labor (per hour)	$13.00

As part of their initiatives to drive demand for Surf-n-Turf at the beginning of the year, the Ballard location offered the Surf-n-Turf at a slight price discount to customers who made their pickup orders online instead of in store. Additionally, since they had already committed to contracted volumes with Luciano's, the increased production and sales would reduce the amount of inventory that went stale periodically.

Nandini, the store's bookkeeper has provided him with the following actual results for the branch:

Revenues: Fish-n-Fowl	$ 1,395,000
Revenues: Surf-n-Turf	$ 2,288,000
Total Revenue	$ 3,683,000
Variable costs:
Tuna Fish	469,120
Sliced Turkey	263,376
Roast Beef	494,208
Pumpernickel Bread	188,800
Labor costs	991,200
Advertising (4.5% of Revenue)	165,735
Total Variable Costs	2,572,439
Contribution Margin	1,110,561
Fixed Costs	950,350
Operating Profit	$ 160,211

At the beginning of the period, fixed costs were budgeted to be $989,250. Actual sales for the period were 186,000 units of the Fish-n-Fowl and 286,000 units of the Surf-n-Turf. During the period, Luciano supplied 137,280 pounds of roast beef, 146,600 pounds of tuna fish salad, 109,740 pounds of turkey and 37,760 loaves of pumpernickel bread in total. To achieve the actual production levels, 70,800 direct labor hours were used during the period. There was no closing raw material inventory at the end of the period.

Required:

1-Construct a) static budget based on the originally expected sales volume, and b) flexible budget based on the actual sales volume using the information provided. Make sure the flexible budget includes revenues, variable production and advertising costs, fixed costs, and operating profit.

2-For operating profit, calculate the static budget variance, flexible budget variance, and sales-activity variance. Be sure to indicate whether the variance is favorable or unfavorable. Explain what each of these profit variances represents.

3-After calculating the flexible budget, Ganga found a total unfavorable flexible budget variance in operating profit for the San Jose location. Account for this unfavorable variance by calculating all flexible budget variances including

• Revenue variances
• Materials efficiency and price variances
• Labor efficiency and price variances
• All other variable and fixed cost variances