Question

Pricing Strategy, Sales Variances

Eastman, Inc., manufactures and sells three products: R, S, and T. In January, Eastman, Inc., budgeted sales of the following.

	Budgeted Volume	Budgeted Price
Product R	112,400	$24
Product S	165,800	20
Product T	15,700	19

At the end of the year, actual sales revenue for Product R and Product S was $2,519,000 and $3,234,600, respectively. The actual price charged for Product R was $22 and for Product S was $18. Only $8 was charged for Product T to encourage more consumers to buy it, and actual sales revenue equaled $334,800 for this product.

Required:

1. Calculate the sales price and sales volume variances for each of the three products based on the original budget.

	Sales price variance		Sales volume variance
Product R	$		$
Product S	$		$
Product T	$		$

2. Suppose that Product T is a new product just introduced during the year. What pricing strategy is Eastman, Inc., following for this product?

Answer 1

1)
Actual Sales	Product R	Product S	Product T
Actual Sales =   Sales revenue / Actual price	114,500 ($2,519,000 / $22)	179,700 ($ 3,234,600 / $18)	41,850 ($ 334,800 / $8)
Sales price variance	Product R	Product S	Product T
Sales price variance    = Actual sales x (Budgeted Price (-) Actual Price)	$229,000 [114,500 x ( $24 (-) $22)]	$359,400 [ 179,700 x ($20 (-) $18)]	$460,350 [ 41,850 x ($19 (-) $8)
	Unfavorable	Unfavorable	Unfavorable
Sales volume variance	Product R	Product S	Product T
Sales volume variance    = Budgeted Price x (Actual Sales (-)Budg. Sales)	50,400 $24 x [114,500 (-) $112,400]	$ 278,000 $20 x [ 179,700 (-) 165,800]	$496,850 $19 x [ 41,850 (-) 15,700)
	Favorable	Favorable	Favorable
2)
Penetration pricing Strategy is followed for product - T if it is newly introduced