Swiss Chocolates U.S. division is experiencing an increase in demand for the month of October due to the upcoming holiday season. The following fact pattern forms the basis for the static budget:

Swiss Chocolate Manufacturing Company

Variable costs total Fixed costs total

Raw materials $ 200,000

Direct manufacturing labor $ 100,000

Indirect manufacturing labor $ 52,500

Factory insurance and utilities $ 31,500

Depreciation machinery and factory $ 38,500

Repairs and maintenance factory $14,000

Selling, marketing and distribution expenses $ 20,000 $ 40,000

General and administrative expenses $ 60,000

Variable cost and volume data Milk chocolate

Raw materials = 0.25 lbs x $2.00/lb. $ 0.50

Direct labor = 0.025 hr x $10/hr. $ 0.25

Volume in units 400,000

Sales per unit are $2.65.

Required:

1. In good form, prepare the static budget operating income in contribution format.

2. Suppose sales demand increases to 500,000 units for October. Prepare the flexible budget for October in contribution format.

3. Compute and reconcile the sales volume variance. Indicate whether the variance is favorable or unfavorable.

4. Presume the following:

Total direct costs incurred for October

Raw materials = 135,000 lbs. used $ 300,000

Direct labor = 12,000 hrs. incurred $ 112,600

Volume in units 515,000

Using the three-pronged method to present your calculations, compute the direct materials price variance, the direct materials efficiency variance, the labor price variance, and the labor efficiency variance. Indicate whether these are favorable or unfavorable.

5. Appraise the outcome of the direct cost variance and give one possible explanation for each of the variances. Be sure that your explanation is interrelated and provides a complete picture of performance for the Swiss Chocolate Manufacturing Company for October.