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National Battery 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	$5
Labor	4
Overhead	11
Total	$20

At the start of the current year, 2015, the company estimated that it would incur $42,800,000 of overhead costs and $5,350,000 of direct labor costs. Thus, $8 of 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 2015, the company experienced a labor strike that severely limited production, and standard labor cost was only $4,719,000. At a recent meeting in early January 2016, C.W. Rogers, the president of National, 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, 2016

To: C.W.

From: Walter

Subject: Effect of strike on company profit

As you know, profit in 2015 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 $42,800,000. Actual overhead was $23,012,000 so we had a favorable overhead budget variance of $19,788,000. However, we applied only $37,752,000 of overhead to inventory ($8 overhead rate $4,719,000 standard labor). Thus, we had an unfavorable overhead volume variance of $5,048,000.

$23,012,000	$42,800,000	$37,752,000 ($8 $4,719,000)
$19,788,000 Favorable	$5,048,000 Unfavorable

*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 $5,048,000 unfavorable 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 $5,350,000 of 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.

(a)

Suppose the strike limited production of the Road Guardian batterya battery for which there is excess demand. Without the strike, 684,000 more of these batteries could have been produced and sold. The selling price of the battery is $48. Taking this into account, calculate the effect of the strike on company profit.

Effect on profit$