Variable Costs Per Unit
Per Unit Variable Cost	Standard						First Quarter 2011 Actual Results						Second Quarter 2011 Actual Results
Direct materials	2.2	lb.	at	$5.70	per lb.	$12.54	2.3	lb.	at	$5.80	per lb.	$13.34	2.0	lb.	at	$6.00	per lb.	$12.00
Direct manufacturing labor	0.5	hrs.	at	$ 12	per hrs.	$ 6.00	0.52	hrs.	at	$ 12	per hrs.	$ 6.24	0.45	hrs.	at	$ 14	per hrs.	$ 6.30
Other variable costs						$10.00						$10.00						$ 9.85
						$28.54						$29.58						$28.15

Static Budget for Each Quarter Based on 2011 First Quarter 2011 Results Second Quarter 2011 Results Units 4,000 4,400 4,800 Selling price $ 70 $ 72 $ 71.50 Sales $280,000 $316,800 $343,200 Variable costs Direct materials 50,160 58,696 57,600 Direct manufacturing labor 24,000 27,456 30,240 40,000 114,160 Other variable costs Total variable costs Contribution margin Fixed costs Operating income 165,840 68,000 $ 97,840 44,000 130,152 186,648 66,000 $120,648 47,280 135,120 208,080 68,400 $139,680

Shaw was relieved to see that the anticipated savings in material waste and rework seemed to have materialized. But, he was concerned that the union would press hard for higher wages given that actual unit costs came in below standard unit costs and operating income continued to climb.

Prepare a detailed variance analysis of the second quarter results relative to the static budget. Show how much of the improvement in operating income arose due to changes in sales volume and how much arose for other reasons. Calculative variances that isolate the effects of price and usage changes in direct materials and direct manufacturing labor. Make sure you break down your variance analysis into Level 1, 2, 3 and make sure you identify and disaggregate all variances to the extent possible.

Use the results of requirement 1 to prepare a rebuttal to the unions anticipated demands in light of the second quarter results.

Terence Shaw thinks that the company can negotiate better if it changes the standards. Without performing any calculations, discuss the pros and cons of

immediately changing the standards.