Question

Results for the fourth quarter of 2019 are provided below. CVI's management is concerned as to why the operating income was lower than budgeted. 2019 fourth-quarter operating statement

Actual Budget Revenues: High-speed Internet service $1,822,800 $1,890,000 Regular-speed Internet service 2.856.000 2.646.000 4,678,800 4,536,000 Expenses Billing and collection (55 per customer per quarter) 226,800 210.000 Variable costs of high-speed service ($15 per customer per quarter) 176,400 189.000 Variable costs of regular-speed service ($5 per customer per quarter) 168,000 147.000 Fixed costs 2.650.000 2.300.000 3221 2002 846 000 Operating income $1.457 600 $1.690.000 The budget was based on CVi holding a 35% market share assuming a total budgeted market size of 120.000 customers.

The actual market size for the fourth quarter of 2019 turned out to be 125.000 customers, due to new apartment buildings in the area. The budget also assumed that 30% of CVI's customers would select the high-speed package and the remaining 70% of CVI's customers would select the regular-speed package CVI's high-speed package was budgeted with a selling price of $150 per customer per quarter. The regular-speed package had a budgeted selling price of $90 per customer per quarter. The actual prices in the fourth quarter were $155 and $85 per customer for the high-speed and regular-speed packages respectively.

[PLEASE PROVIDE TYPE-WRITTEN ANSWER -> Not hand-written, hard to understand handwriting]

Calculate each of the following variances:

a) Sales price variance

b) sales volume variance

c) Sales quantity variance

d) Sales mix variance

e) Market size variance

f) Market share variance

Answer 1

Budgeted Market Share= 35% , Budgeted Market Size:-120,000

Actual Market Size:- 125,000

Actual Market Share :- (11,760+33,600)/125,000 = 45360/125,000 = 36.288%

Fourth Quarter Operating Statement

	Actual	Budgeted
High-speed Internet Service	$1,822,800 ($155*11,760 Customer)	$1,890,000 ($150*12,600 Customer)
Regular-speed Internet Service	$2,856,000 ($85*33,600 Customers)	$2,646,000 ($90*29,400 Customer)
Total Revenue	$4,678,800	$4,536,000
Expenses :-
Billing and Collection	$226,800	$210,000
Variable Cost:-
High-speed Internet Service	$176,400	$189,000
Regular-speed Internet Service	$168,000	$147,000
Fixed Cost	$2,650,000	$2,300,000
Total Expenses	$3,221,200	$2,846,000
Operating Income	$1,457,600	$1,690,000

a) Sales Price Variance = Actual Customers (Actual Selling Price- Budgeted Selling Price)

High-speed Internet Service = 11,760($155-$150)= 11,760*$5= $58,800 Favourable

Regular-speed Internet Service= 33,600($85-$90)= 33,600*$5= $168,000 Unfavourable

Total Price Variance = $109,200 Unfavourable ($168,000-$58,800)

b) Sales Volume Variance = Budgeted Selling Price (Actual Customer - Budgeted Customer)

High-speed Internet Service = $150 (11,760-12,600) = $150*840 = $126,000 Unfavourable

Regular-speed Internet Service= $90(33,600- 29,400) = $90*4,200 = $378,000 Favourable

Total Volume Variance = $252,000 Favourable ($378,000-$126,000)

c) Sales Quantity Variance = Budgeted Selling Price (Revised Actual Customer- Budgeted Customer)

Revised Actual Customer:-

High-speed Internet Service = [12,600/(12,600+29,400)]*(11,760+33,600)= (12600/42,000)*45,360= 13,608

Regular-speed Internet Service= [29,400/(12,600+29,400)]*(11,760+33,600)= (29,400/42,000)*45,360=31,752

Total = 13,608+31,752 = 45,360

High-speed Internet Service = $150 (13,608-12,600) = $150*1,008 = $151,200 Favourable

Regular-speed Internet Service= $90(31,752- 29,400) = $90*2,352= $211,680 Favourable

Total Quantity Variance = $362,880 Favourable ($151,200-$211,680)

d) Sales Mix Variance= Budgeted Selling Price(Actual Customer - Revised Actual Customer)

High-speed Internet Service = $150 (11,760-13,608) = $150*1,848 = $277,200 Unfavourable

Regular-speed Internet Service= $90(33,600- 31,752) = $90*1,848 = $166,320 Favourable

Total Mix Variance = $110,880 Unavourable ($277,200-$166,320)

e) Market Size Variance = Standard Margin Per Unit[Budgeted Market Share(Actual Size-Budgeted Size)

Calculation of Standard Margin Per Unit

	High-speed Internet Service	Regular-speed Internet Service
Actual Selling Price per unit	$150	$90
Billing &Collection	$55	$55
Variable Cost	$15	$5
Standard Margin Per Unit	$80	$30

Total Market Size Variance= ($80+$30)[35%(125,000-120,000)] = $110[35%*5000] = $110*1750 =$192,500 Favourable

f) Market Share Variance = Standard Margin per Unit [ Actual Size(Actual Share- Budgeted Share)]

Total Market Share Variance =($80+$30)[125,000(36.288%-35%)= $110[125,000*1.288%]= $110*1610 = $177,100 Favourable