TheRichettiBattery Company produces a wide variety of batteries for home, automobile, and marine use. One example of its many products is the Road Guardian automobile battery. The standard cost for this battery is as follows:

Standard Cost, Road Guardian

Material$4Labor3Overhead11Total$18

At the start of the current year, 2021, the company estimated that it would incur $46,000,000of overhead costs and $5,750,000of direct labor costs. Thus, $8of overhead is applied at standard for each dollar of direct labor. Overhead is essentially completely fixed, which reflects the high level of investment in automated manufacturing.

During 2021, the company experienced a labor strike that severely limited production, and standard labor cost was only $5,030,000. At a recent meeting in early January 2022, C. W. Rogers, the president ofRichetti, asked the company controller, Walter Cox, to estimate the effect of the strike on company profit. The following morning, Walter sent the president a memo:

Date: January 7, 2022

To: C.W.

From: Walter

Subject: Effect of strike on company profit

As you know, profit in 2021 was greatly affected by a strike, which reduced productive capacity. The way to measure the impact of the reduced capacity is to examine the overhead volume variance. At the start of the year, we budgeted overhead to be $46,000,000. Actual overhead was $44,166,000so we had a favorable overhead budget variance of $1,834,000. However, we applied only $40,240,000of overhead to inventory ($8overhead rate $5,030,000standard labor). Thus, we had an unfavorable overhead volume variance of $5,760,000.

$44,166,000$46,000,000$40,240,000

($8 $5,030,000)$1,834,000Favorable$5,760,000Unfavorable

*Note that budgeted overhead does not need to be adjusted for actual production since overhead costs are, for practical purposes, fixed. Thus, overhead in a static budget and in a flexible budget are equal.

In my opinion, the $5,760,000unfavorable volume variance tells the story of our poor profit performance. If we had not had the strike, production would have been at a higher level (a level requiring $5,750,000of standard labor cost), and this variance would have been avoided.

C. W., I realize that you are not an accountant, so please call me if you have any questions about my analysis.

(a1)Suppose the strike limited production of the Road Guardian batterya battery for which there is excess demand. Without the strike,709,000more of these batteries could have been produced and sold. ($720,000of direct labor not available $3of labor per battery). The selling price of the battery is $46. Taking this into account, calculate the effect of the strike on company profit.