Taonga Whero Ltd hired a new marketing manager early last year. After an informal consumer survey, the marketing manager decided to lower the firm's selling price by 10 per cent and increase television advertising. The operating results at year end were disappointing. The marketing manager prepared the following analysis. He assumed that direct materials and direct labour were variable costs and that advertising was a fixed cost.

Budget

Actual

Variance

Units

150,000

170,000

Sales

$937,500

$956,250

$18,750

F

Direct materials

$225,000

$249,900

$24,900

U

Direct labour

$262,500

$289,000

$26,500

U

Variable overhead

$112,500

$127,500

$15,000

U

Fixed overhead

$75,000

$75,200

$200

U

Advertising

$20,000

$40,000

$20,000

U

Operating income

$242,500

$174,650

$67,850

U

"As you can see", the marketing manager reported, "the major problem is due to inefficiencies in production. My plan would have worked if production had managed its costs better."

(a) flexible budget report.

(21 marks)

(b)What is the real source of the disappointing results? Explain.

(You musttypeyour answer - do not handwrite)