Question

RTI Company’s master budget calls for production and sale of 18,100 units for $81,450, variable costs of $30,770, and fixed costs of $18,000. During the most recent period, the company incurred $34,100 of variable costs to produce and sell 18,000 units for $84,000. During this same period, the company earned $23,000 of operating income.

QUESTIONS:

1. Determine the following for RTI Company: (Do not round intermediate calculations. Round your answers to the nearest whole dollar.)

a. Flexible-budget operating income.

b. Flexible-budget variance, in terms of contribution margin. Was this variance favorable (F) or unfavorable (U)?

c. Flexible-budget variance, in terms of operating income. Was this variance favorable (F) or unfavorable (U)?

d. Sales volume variance, in terms of contribution margin. Was this variance favorable (F) or unfavorable (U)?

e. Sales volume variance, in terms of operating income. Was this variance favorable (F) or unfavorable (U)?

Answer 1

a. Flexible-budget operating income

	Flexible Budget
Sales revenue ($81450/18100*18000)	$81000
Less: Variable costs ($30770/18100*18000)	-30600
Contribution margin	50400
Less: Fixed costs	-18000
Operating income (loss)	$32400

b. Flexible-budget variance, in terms of contribution margin. Was this variance favorable (F) or unfavorable (U)?

Actual contribution margin= Sales-Variable costs

= $84000-34100= $49900

Flexible budget variance, in terms of contribution margin= Actual contribution margin-Flexible budget contribution margin

= $49900-50400= $500 U

c. Flexible-budget variance, in terms of operating income. Was this variance favorable (F) or unfavorable (U)?

Flexible budget variance, in terms of operating income= Actual operating income-Flexible budget operating income

= $23000-32400= $9400 U

d. Sales volume variance, in terms of contribution margin. Was this variance favorable (F) or unfavorable (U)?

Master budget contribution margin= Sales-Variable costs

= $81450-30770= $50680

Sales volume variance, in terms of contribution margin= Flexible budget contribution margin-Master budget contribution margin

= $50400-50680= $280 U

e. Sales volume variance, in terms of operating income. Was this variance favorable (F) or unfavorable (U)?

Master budget operating income= Master budget contribution margin-Fixed cost

= $50680-18000= $32680

Sales volume variance, in terms of operating income= Flexible budget operating income-Master budget operating income

= $32400-32680= $280 U