Question

The next year's budget for Benny, Inc., is given below: Product 1/2 Sales $945,000/688500 Variable costs 459,900/297,000 Fixed costs 300,000/300,000 Net income $185,100/$91,500 Units 126,000/54,000 Market share 12%/20.0% At the end of the year, the total fixed costs and the variable costs per unit were exactly as budgeted, but the following units per product line were sold: Product Line- Units- Sales- Mkt share 1- 126,200- $958,579- 16.0% 2- 56,800- $721,010- 14.2% Required: (Be sure to indicate whether the variance is favorable or unfavorable.) a. Compute the sales activity variance for each product. b. Compute the market share variance for each product. c. Compute the industry volume variance for each product.

Answer 1

Part a)

To compute the sales activity variance we need to arrive at the contribution margin per unit for each product as below:

Contribution Margin Per Unit (Product 1) = (Sales - Variable Costs)/Sales in Units = (945,000 - 459,900)/126,000 = $3.85

Contribution Margin Per Unit (Product 2) = (Sales - Variable Costs)/Sales in Units = (688,500 - 297,000)/54,000 = $7.25

Now, we can determine the sales activity variance as below:

Sales Activity Variance = Contribution Margin Per Unit*(Actual Sales - Budgeted Sales)

Sales Activity Variance (Product 1) = 3.85*(126,200 - 126,000) = $770 (Favorable)

Sales Activity Variance (Product 2) = 7.25*(56,800 - 54,000) = $20,300 (Favorable)

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Part b)

The market share variance for each product is determined as below:

Market Share Variance = Contribution Per Unit*(Actual Sales - Actual Sales/Actual Market Share*Budgeted Market Share)

Using the values provided in the question in the above formula, we get,

Market Share Variance (Product 1) = 3.85*(126,200 - 126,200/16%*12%) = $121,467.50 (Favorable)

Market Share Variance (Product 2) = 7.25*(56,800 - 56,800/14.2%*20%) = $168,200 (Unfavorable)

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Part c)

The industry volume variance for each product is calculated as follows:

Industry Volume Variance = Contribution Per Unit*(Actual Sales/Actual Market Share*Budgeted Market Share - Budgeted Sales)

Using the values provided in the question in the above formula, we get,

Industry Volume Variance (Product 1) = 3.85*(126,200/16%*12% - 126,000) = $120,697.50 (Unfavorable)

Industry Volume Variance (Product 2) = 7.25*(56,800/14.2%*20% - 54,000) = $188,500 (Favorable)