Vince Jacobs is the manufacturing production supervisor for High-Five Inline Skates Company. Try¬ ing to explain why he did not get the year-end bonus he had expected, he told his wife, “This is the dumbest place I ever worked. Last year the company set up this budget assuming it would sell 200,000 skates. Well, it sold only 190,000. The company lost money and gave me a bonus for not using as much materials and labor as was called for in the budget. This year, the company has the same 200,000 goal and it sells 210,000. The company’s making all kinds of money. You’d think I’d get this big fat bonus. Instead, management tells me I used more materials and labor than was budgeted. They say the com¬ pany would have made a lot more money if I’d stayed within my budget. I guess I gotta wait for another bad year before I get a bonus. Like I said, this is the dumbest place I ever worked.”

High-Five Company’s master budget and the actual results for the most recent year of operating activity follow.

Required

a. Did High-Five increase unit sales by cutting prices or by using some other strategy?

b. Is Mr. Jacobs correct in his conclusion that something is wrong with the company’s performance evaluation process? If so, what do you suggest be done to improve the system?

c. Prepare a flexible budget and recompute the budget variances.

d. Explain what might have caused the fixed costs to be different from the amount budgeted.

e. Assume that the company’s material price variance was favorable and its material usage variance was unfavorable. Explain why Mr. Jacobs may not be responsible for these variances. Now, explain why he may have been responsible for the material usage variance.

f. Assume the labor price variance is favorable. Was the labor usage variance favorable or unfavorable?

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Master Budget Actual Results Variances F or U Number of units 200,000 Sales revenue $40,000,000 210,000 $42,630,000 10,000 $2,630,000 F Variable manufacturing costs Materials (6,000,000) (6,115,200) 115,200 Labor (5,600,000) (5,974,500) 374,500 Overhead (2,400,000) (2,471,700) 71,700 - U U U Variable general, selling, and admin. costs (7,600,000) (8,110,200) 510,200 Contribution margin 18,400,000 19,958,400 1,558,400 UF Fixed costs Manufacturing overhead (8,150,000) (8,205,000) 55,000 U General, selling, and admin. costs (7,200,000) (7,176,000) 24,000 F Net income. $ 3,050,000 $ 4,577,400 $1,527,400 F