Question: The Software Development Company produces computer
The Software Development Company produces computer programs on DVDs for home computers. This business is highly automated, causing fixed costs to be very high, but variable costs are minimal. The entity is organised along three product lines: games, business programs, and educational programs. The average standard selling prices for each are $16 for games, $55 for business programs, and $20 for educational programs. The standard variable cost consists solely of one DVD per program at $2.00 per DVD, without regard to the type of program. Fixed costs for the period were estimated at $535 000. For the current period, standard sales are 40 000 games, 2000 business programs, and 10 000 educational programs. Actual results are as follows.
Required
(a) Calculate standard pre-tax income and then reconcile it to actual pre-tax income by calculating the contribution margin sales mix variance, revenue sales quantity variance, sales price variance, materials price and quantity variances, and the fixed cost spending variance.
(b) A new marketing manager was hired during the period. The manager changed prices and redirected sales efforts.
1. Discuss whether one or more of the preceding variances are relevant to evaluating the performance of the new marketing manager.
2. What do the variances suggest about the new manager’s performance? Explain.
(c) An analysis reveals that the company will have to pay $1.80 per DVD next period. Prepare next period’s master budget. Assume a standard of one disk per program, total unit sales of 55 000, and the actual sales mix and sales prices from this period.
(d) Discuss possible reasons why the company might not meet its budget for next period.
Transcribed Image Text:
Sales: Games Business Educational Total sales Variable costs Fixed costs Pre-tax income (35 000 DVDs) (4 000 DVDs) (11 000 DVDs) (50 750 DVDs) $ 616 000 198 000 220 000 1 034 000 106 575 533 500 $ 393 925
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