7.

42
a. Once again, we apply the inventory equation to solve this problem. Using the
information provided, we have (units in linear feet):

Desired ending inventory

(in linear feet)
+ Needed for production
= Total requirements
- Beginning inventory
= Budgeted purchases
(linear feet)
Purchases budget =
budgeted purchases $0.75
per foot

Detail
March
75,840 40% of April needs =
0.40 15,800 boxes
12 feet/box.
144,000 12,000 boxes to be
produced 12 feet/box.
219,840
50,000 Given
169,840

$127,380

b. Boston would use 144,000 linear feet of cardboard strips to produce the boxes. The
total materials cost = 144,000 $0.75 = $108,000. An inventory cost flow
assumption is not required in this instance because the entire inventory (beginning
inventory plus purchases) is valued at $0.75 per linear foot.
c. Because Boston has different layers of inventory with differing prices, the cost flow
assumption now becomes important. With FIFO, the firm will consume the oldest
layer first before consuming purchases.
Thus, we have:
From beginning inventory 50,000 linear feet @ $0.70/ft $35,000
From March purchases
94,000* linear feet @$0.75/ft $70,500
Total materials cost
$105,500
* 94,000 = 144,000 50,000
Notice that the cost of materials usage has decreased. Why?
Under the FIFO cost flow assumption used by Boston, the materials in beginning
inventory will be used up first. Bosworths beginning inventory is valued at $35,000.
That difference of $2,500 (50,000 linear feet 0.05/ft) causes the cost of material usage
to decrease.

Note: The usage budget for March would not change if Boston uses the LIFO method.
The firm would not be dipping into the layer of beginning inventory, meaning that all
144,000 linear feet used would be valued at $0.75 per foot.

7.47
a. We can do this problem in two ways. The short method is to recognize that Kris
would have collected all of her sales for March and April by May 31. She also would
have collected 50% of May sales in May. Thus, her accounts receivable would be
50% of May sales or $23,000 (= $46,000 0.50).
The longer method is to write down her accounts receivable, using a format similar to
that for inventory accounts. We have:

Opening balance for receivables

+ Current sales
= Total collectible
- Collections for prior month
- Collections for current month
Closing balance for receivables

April

May

$25,000
40,000
$65,000
25,000
20,000
$20,000

$20,000
46,000
$66,000
20,000
23,000
$23,000

b. Again, we can do this problem in two ways. The short method is to recognize that
Kris would have paid for all of her purchases in March and April by May 31. She also
would have paid for 80% of purchases in May. Thus, her accounts payable would be
20% of May purchases or 0.20 $40,000 = $8,000.
The longer method is to write down her accounts payable, using a format similar to that
for inventory accounts. We have:
April
Opening balance for payables
+ Current purchases
= Total payable
- Payments for prior month
- Payments for current month
Closing balance for payables

$6,000
32,000
38,000
6,000
25,600
$6,400

May

$6,400
40,000
46,400
6,400
32,000
$8,000

7.48
This is an open-ended question with many possible views on the Wilmas best course of
action. We summarize some possible arguments below.

Some might argue that Wilma should follow Scott Ford and Jakes Lewis lead and pad
her budget as well. The problem appears to be very rigid standards and a formulaic
approach to incentive compensation. The founders approach, some may argue, leaves the
managers no choice, but to build in some cushion. Indeed, we might justify Jakes actions
as beneficial in the long term, although we only have his word that the cushion is for
long-term improvements. Some might question Scotts excessive low-balling, although
how much is OK and how much is excessive is not resolved easily.
At the other extreme, clearly the firms plans contain information known to be false.
Ethical standards for accounting professionals preclude Wilma from knowingly
compromising the integrity of information. Thus, she might have no choice but to try and
rectify the situation as much as possible. Doing so, however, might pit her against the
other managers, limiting her effectiveness.
Overall, a pragmatic approach might involve attempting to educate the owner about the
pitfalls of his methods. Indeed, Wilma might find that Roy is well aware of the padding
by his managers and that this is the game that all in the firm agree to (implicitly). In this
case, Wilmas conscience is clear and, in our opinion, she would comply with accounting
standards as well. Thus, our recommendation is for Wilma to speak with Roy and feel
him out on his views about budget padding before taking the next step.

7.56
This problem highlights the planning role for budgets. Let us first determine the variable
and fixed costs corresponding to Naomis operations.
Item
Direct materials
Direct labor
Selling & Adm.
Fixed costs

Detail
$480,000/120,000 units
$720,000/120,000 units
$120,000/$2.4 million

Current cost
$4/unit
$6/unit
5% of sales $
$888,000

Expected cost
$4.40/unit
$6.30/unit
5% of sales $
$888,000

With this data in hand, let us prepare a projected income statement if Naomi raises her
price to $22 per unit.
Price = $22 & Number of units sold = 120,000
Revenues (120,000 units $22)
$2,640,000
Variable costs
Direct materials
$528,000
Direct labor
756,000
Selling and administration
132,000
$1,416,000
Contribution Margin
$1,224,000
Fixed costs

Manufacturing
Marketing and sales
General administration
Profit before taxes
Return on sales
($336,000/$2,640,000)

540,000
120,000
228,000

$888,000
$336,000
12.73%

Let us repeat the exercise with the lower-price, high-volume strategy.

Price = $19 & Number of units sold = 175,000
Revenues (175,000 units $19)
$3,325,000
Variable costs
Direct materials
$770,000
Direct labor
1,102,500
Selling and administration
166,250
$2,038,750
Contribution Margin
$1,286,250
Fixed costs
Manufacturing
$540,000
Marketing and sales
120,000
General administration
228,000
$888,000
Profit before taxes
Return on sales
($398,250/$3,325,000)

$398,250
11.98%

Both strategies meet Naomis goals of increasing her profit and return on sales. However,
the two income statements conflict in terms of expected profit and expected profitability.
The higher-price, lower volume strategy has lower profit but higher profitability.
Naomis choice therefore depends on her goals and the nature of the product market. In
some instances, such as often occurs with premium products, it can make most sense to
go for a high margin strategy, sacrificing volume. In other instances, such as with
consumer goods, it might make more sense to lock up the market by going for sales
growth. Regardless, projecting future income statements under alternate formats help
firms put a number on the tradeoff and make a more informed choice.
In Naomis case, she does not appear to have a sustainable competitive advantage for the
types of products she offers (the barriers to entry are likely minimal) thus, we would
argue for setting a lower price and getting a larger share of the market.
7.57
The participative budget described here seems participative in name only. The goal for
participative budgets is to take advantage of localized knowledge that operating
personnel possess. In virtually every instance, the participative input is subject to

oversight and discussion. Some amount of revision is also common. However, excessive
and arbitrary review that substitutes a top-down target for a bottom-up estimate makes a
mockery of the process, eliminating its value. This appears to be the case in Walters
firm. Melanies statement hints at a very autocratic style that essentially says, My way
or the highway.
The revision process also appears to be arbitrary and capricious. There is little incentive
for the salespersons to spend much time and effort in projecting the true expected sales
because they know that the target would be revised upwards and Walters estimate will
prevail.
This problem lays the foundation for an interesting discussion about the costs and
benefits of participative budgeting. While these budgets are useful, they also give rise to
game playing and slack. Reviews by top management cut down on slack, but also remove
some of the benefits. How best to manage the tradeoff is an open-ended problem with no
clear answer. Research has identified factors that increase game playing (excessive
reliance on incentives, uncertain environment, lack of management experience at the top,
lack of trust) but executing the tradeoff well remains an art.
8.34
The following table shows Hercules master budget, flexible budget, and actual results
for April.

# of members
Revenue
Variable costs
Contribution margin
Fixed costs
Profit

Master
Budget
950
$95,000
33,250
$61,750
42,000
$19,750

Flexible
Budget
975
$97,500
34,125
$63,375
42,000
$21,375

Actual
Results
975
$98,100
34,125
$63,975
43,000
$20,975

We therefore have:
(1) Sales volume variance
(2) Sales price variance,
(3) Variable cost variance
(4) Fixed cost variances

= $21,375 - $19,750
= $98,100 - $97,500
= $34,125 - $34,125
= $42,000 -$43,000

= $1,625 F
= $600 F
= $0
= $1,000 U

Of course, the sum of these variances is $1,225F, which is the difference between the
actual and budgeted profit.

8.35

To calculate the chlorine price and quantity variances, we need to know: (1) the flexible
budget for chlorine; (2) the as if budget for chlorine with actual efficiencies; and (3) the
actual results. The table below provides the required computations and accompanying
variances.

Chlorine

Flexible
Budget1
$2,000

Quantity
Variance
$240 U

As if
budget2
$2,240

Price
Variance
$140 F

Actual
Results3
$2,100

$2,000= 500 pools .50 gallons per pool $8.00 budgeted cost per gallon.
$2,240 = 280 gallons actually used $8.00 budgeted cost per gallon.
3
$2,100 = 280 gallons actually used $7.50 actual cost per gallon.
2

Thus, Crystals chlorine price and quantity variances were $140 F and $240 U,
respectively, for the most recent week.
8.36
To calculate the materials price and quantity variances, we need to know: (1) the flexible budget
for materials; (2) the as if budget for materials with actual efficiencies; and (3) the
actual results. The table below provides the required computations and accompanying
variances.

Materials

Flexible
Budget1
$750

Quantity
Variance
$62.50 U

As if
budget2
$812.50

Price
Variance
$32.50 U

Actual
Results3
$845

$750 = 300 vases actually produced 2 pounds of materials budgeted per vase
$1.25 budgeted cost per pound.
2
$812.50 = 650 pounds of materials actually used $1.25 budgeted cost per
pound.
3
Given.
Thus, Glass Vessels materials price and quantity variances were $32.50 U and
$62.50U, respectively, for March.

b.
As in part [a], to calculate the labor price and quantity variances, we need to know: (1)
the flexible budget for labor; (2) the as if budget; and (3) the actual results. The table
below provides the required computations and accompanying variances.

Labor

Flexible
Budget1
$6,750

Quantity
Variance
$450 U

As if
budget2
$7,200

Price
Variance
$0

Actual
Results3
$7,200

$6,750 = 300 vases actually produced 1.5 hours of labor budgeted per vase
$15.00 budgeted cost per labor hour.
2
$7,200 = 480 hours actually worked $15 budgeted cost per labor hour.
3
Given.
Thus, Glass Vessels labor price and quantity variances were $0 and $450 U,
respectively, for March.
8.49
a.
With the information provided, Space Toys flexible budget for the most recent quarter of
operations is:

Rocket ship sales

Revenue
Variable costs
Contribution margin
Fixed costs
Profit

Flexible Budget
12,000 units

Detail
Actual sales

$300,000

12,000 $25;
$25 = $375,000/15,000
12,000 $5;
$5 = $75,000/15,000

60,000
$240,000
150,000
$90,000

from the master budget

b.
The sales volume variance = flexible budget profit master budget profit, or $90,000
$150,000 = ($60,000) or $60,000 U.
The sales price variance = actual revenue flexible budget revenue, or $300,000
$300,000 = $0.
c.
The variable cost variance = flexible budget variable costs actual variable costs, or
$60,000 $54,000 = $6,000 or $6,000 F.
The fixed cost variance = budgeted fixed costs actual fixed costs, or $150,000
$141,000 = $9,000 or $9,000 F.
Note: We do not have enough information to decompose the flexible budget variable cost
variance into price and quantity components.
d.
Based on the variances we calculated, it appears that the Marketing Director is
responsible. Sales are 3,000 units lower than expected; this alone reduced Space Toys
profit by $60,000, as shown by the unfavorable sales volume variance. Moreover, actual

profit would have been $90,000, or 40% lower than expected had the production manager
not done an excellent job controlling costs (as evidenced by the total $15,000 favorable
cost variances). A focus on sales and income masks the Production Managers good
performance, and mutes the Marketing Directors poor performance.
There are, of course, caveats to this story. For example, the decrease in sales may actually
be related to the Production Managers excellent performance. For example, it is possible
that the Production Managers cost-cutting efforts reduced the quality of the product
which, in turn, reduced the demand for the product.
It also is possible that the decrease in sales volume is outside the Marketing Managers
control; for example, consumer tastes and preferences may have changed (perhaps rocket
ships were hot last year and not the trend this year). Alternatively, perhaps a competitor
has entered the market and captured some of Space Toys market share. Such reasons
underscore the importance of examining market size and market share variances, issues
that are addressed in Appendix B and the next problem.
8.50
To compute the market size and share variances, we need data on budgeted market size
and actual market share. Because the problem does not provide these numbers, we need
to compute them:
Budgeted market size. The budget called for sales of 15,000 rocket ships, and this volume
was estimated to be 10% of the market. Consequently, the budgeted market size must
have been 150,000 units = 15,000/0.10.
Actual market share. The actual market size was 100,000 rocket ships, and the actual
sales volume was 12,000 rocket ships. Consequently, the actual market share =
12,000/100,000 = 12%.
We now have all of the data necessary to compute the market size and market share
variances. From appendix B, we know that:
Market Share Variance = Actual Market Size (Actual Market Share Budgeted Market
Share) Budgeted Unit Contribution Margin.
Market Size Variance = (Actual Market Size Budgeted Market Size)
Budgeted Market Share Budgeted Unit Contribution Margin.
From the earlier problem, we know that Budgeted Unit Contribution Margin = $20 per
rocket ship. Thus, we have:
Market Share Variance = 100,000 (0.12 0.10) $20 = $40,000 F.
Market Size Variance = (100,000 150,000) 0.10 $20 = $100,000 U.

Of course, the sum of the market size and share variances is $60,000 U, which is exactly
what we determined to be the sales volume variance in the earlier problem.
The market-size and market-share variances inform us that the decrease in revenue is
attributable to the substantial reduction in the overall size of the market and not Space
Toys share of the market. Because of this, we probably would re-evaluate our
assessment of the Marketing Managers performance. The marketing manager cannot
control consumer tastes and preferences (market size) in this regard, it is possible that a
new toy is hot i.e., perhaps rocket ships were big last year and a different toy is hot
this year. Because of this, we naturally would expect Space Toys sales to decrease, at no
fault of the Marketing Manager.
Holding the size of the market constant, Space Toys share has increased from 10% to
12% this implies that the Space Toys has improved their position in the market vis-vis their competition. Because this is part of the job of the Marketing Manager, we would
conclude that s/he has done well, although we may still wish to examine whether market
share has increased simply because a competitor has exited the market.
8.55
To calculate the actual quantity of materials used, we use the quantity variance that
compares the flexible budget to the as if budget. We cannot use the price variance since
there are two unknowns, the actual price and quantity.
We know that the quantity variance equals the difference between the flexible budget
quantity and the actual quantity multiplied by the budgeted price. Plugging in the data
provided, we have:
($1,875) = (2,500 52,500 actual quantity of materials) $0.0001.
Or, actual quantity of materials = 150,000,000 mgs.

b.
To calculate the actual price paid for materials, we use the price variance and our answer
from part (a):
Price variance = (budgeted price actual price) actual quantity.
With the data provided, we have:
$3,000 = ($0.0001 actual price) 150,000,000.
Or, actual price = $0.00008 per mg.

c.
Following the same setup that we used for materials, we have:
Using the quantity variance and the other data provided, we have:
$180 = (2,500 (6/60 hours per bottle) actual quantity of labor) $12.00.
Or, actual quantity of labor = 235 hours.

d.
To calculate the actual price paid for labor, we use the price variance:
Using the price variance and the other data provided, we have:
($188) = [$12.00 actual price] 235.
Or, actual price = $12.80 per hour.

8.48
Using the information provided, we have:

Revenue F1
Revenue F2
Revenue F3
Variable costs - F1
Variable costs - F2
Variable costs - F3
Contribution margin
Fixed costs
Profit

Master Budget
$3,750,000
3,000,000
4,000,000
1,875,000
1,650,000
2,400,000
$4,825,000
3,860,000
$965,000

Flexible budget
$4,500,000
2,000,000
4,000,000
2,250,000
1,100,000
2,400,000
$4,750,000
3,860,000
$890,000

Actual results
4,500,000
2,000,000
4,000,000
2,250,000
1,100,000
2,400,000
$ 4,750,000
3,860,000
$890,000

Thus:
Sales volume variance = flexible budget profit master budget profit = $890,000
$965,000 = ($75,000) or $75,000 U.
Flexible budget variance = actual profit flexible budget profit = $890,000 $890,000
= $0.
We expect the flexible budget variance to be zero because the unit selling prices, variable
costs and fixed costs were all as budgeted. The sales volume variance is a bit puzzling,

though. Tornado budgeted to sell a total of 50,000 units and actually sold this amount.
Yet, the company has a sales volume variance of $75,000 U. How could this be? Parts (b)
and (c) help us understand this result.

b. & c.
We gain intuition into Tornados operating results by recasting the above data using a
Weighted Unit Contribution Margin (WUCM). We have:

Total units
Weighted Unit
Contribution
Margin1
Contribution margin
Fixed costs
Profit before taxes

Master budget
50,000

Flexible budget
50,000

Actual results
50,000

$96.50
$4,825,000
3,860,000
$965,000

$95.00
$4,750,000
3,860,000
$890,000

$95.00
$ 4,750,000
3,860,000
$890,000

: $96.50 in master budget = 25,000/50,000 $75 + 15,000/50,000 $90 + 10,000/50,000 $160; $95.00
in flexible budget = 30,000/50,000 $75 + 10,000/50,000 $90 + 10,000/50,000 $160. The flexible
budget and actual WUCM are both $95 because the budgeted selling prices and variable costs for all three
products were the same as the actual selling prices and variable costs.

NOTE: We also could compute the WUCM for the master budget as $96.50 (=
$4,825,000/50,000 units). Similar computations apply to the other columns.
This table informs us that the flexible budget variance is a direct consequence of the
WUCM being different for the master budget and the flexible budget. This occurs even
though both budgets use the same unit selling prices and variable costs. Why? Because
the two budgets could have a different sales mix the master budget employs the original
sales mix and sales volume, while the flexible budget uses the actual sales mix and
volume.
Thus, the sales volume variance mingles two effects changes in the total number of
units sold and changes in the mix of units sold. We could decompose the two factors as
below:

Total units
Weighted Unit
Contribution Margin
Contribution margin

As if budget
with budgeted
Master Budget
sales mix
50,000
50,000
$96.50
$4,825,000

$96.50
$4,825,000

Flexible
budget
50,000
$95.00
$ 4,750,000

Fixed costs
Profit before taxes

3,860,000
$965,000

3,860,000
$965,000

3,860,000
$890,000

The profit difference between the first two columns is purely due to changes in sales
quantity, holding sales mix constant. For Tornado, the sales quantity variance is $0 =
$965,000 $965,000. The sales mix variance is the profit difference between the as if
budget and the flexible budget. For Tornado, the sales mix variance = ($75,000) U =
$890,000 $965,000.
Alternatively, We could compute the answers using the formulae provided in Appendix
C.
Sales Mix Variance = Actual Total Sales (WUCMflexible budget WUCMmaster budget).
Sales Quantity Variance = (Actual Total Sales Budgeted Total Sales)
WUCMmaster budget.
Plugging in the numbers we have:
Sales Mix Variance = 50,000 ($95 - $96.50) = ($75,000) or $75,000 U.
Sales Quantity Variance = (50,000 50,000) $95 = $0.
d.
The change in the sales mix is the reason for the unexpected drop in profit. The sales mix
has shifted toward the less profitable (on a per unit basis) F1 and away from the more
profitable F2. Consequently, the average vacuum cleaner now only yields $95 in
contribution margin rather than the budgeted amount of $96.50. This change in mix over
50,000 units leads to a net drop of $75,000 in profit ($75,000 = 50,000 $1.50).
8.49

a.
With the information provided, Space Toys flexible budget for the most recent quarter of
operations is:

Rocket ship sales

Revenue
Variable costs
Contribution margin
Fixed costs
Profit

Flexible Budget
12,000 units

Detail
Actual sales

$300,000

12,000 $25;
$25 = $375,000/15,000
12,000 $5;
$5 = $75,000/15,000

60,000
$240,000
150,000
$90,000

from the master budget

b.
The sales volume variance = flexible budget profit master budget profit, or $90,000
$150,000 = ($60,000) or $60,000 U.
The sales price variance = actual revenue flexible budget revenue, or $300,000
$300,000 = $0.
c.
The variable cost variance = flexible budget variable costs actual variable costs, or
$60,000 $54,000 = $6,000 or $6,000 F.
The fixed cost variance = budgeted fixed costs actual fixed costs, or $150,000
$141,000 = $9,000 or $9,000 F.
Note: We do not have enough information to decompose the flexible budget variable cost
variance into price and quantity components.
d.
Based on the variances we calculated, it appears that the Marketing Director is
responsible. Sales are 3,000 units lower than expected; this alone reduced Space Toys
profit by $60,000, as shown by the unfavorable sales volume variance. Moreover, actual
profit would have been $90,000, or 40% lower than expected had the production manager
not done an excellent job controlling costs (as evidenced by the total $15,000 favorable
cost variances). A focus on sales and income masks the Production Managers good
performance, and mutes the Marketing Directors poor performance.
There are, of course, caveats to this story. For example, the decrease in sales may actually
be related to the Production Managers excellent performance. For example, it is possible
that the Production Managers cost-cutting efforts reduced the quality of the product
which, in turn, reduced the demand for the product.
It also is possible that the decrease in sales volume is outside the Marketing Managers
control; for example, consumer tastes and preferences may have changed (perhaps rocket
ships were hot last year and not the trend this year). Alternatively, perhaps a competitor
has entered the market and captured some of Space Toys market share. Such reasons
underscore the importance of examining market size and market share variances, issues
that are addressed in Appendix B and the next problem.
8.57
a.
With the information provided, we calculate Sharis master budget profit for May as:
Revenue
$16,000
Variable costs
4,000
Contribution margin $12,000

= $16,000 .25

Fixed costs
Profit

6,000
$6,000

Alternatively, we can use the CVP model (employing the contribution margin ratio
approach) to compute Sharis master budget profit for May. We begin by noting that
Sharis contribution margin ratio is 75% = (1 the variable cost ratio) = 1 0.25 = 0.75.
Accordingly, we have:
Profit before taxes = Contribution margin ratio Revenue fixed costs.
OR, 0.75 $16,000 $6,000 = $6,000 of budgeted profit for May.
Sharis actual profit for May was:
Revenue
$21,000
Variable costs
5,800
Contribution margin $15,200
Fixed costs
6,300
Profit
$8,900

= total costs fixed costs

Thus, Sharis total profit variance for May = $8,900 $6,000 = $2,900 or $2,900 F.
b.
The challenging aspect of this problem is determining what to use for the flexible budget
computations. The given actual volume of operations is total revenue (not sales quantity),
which is comprised of sales quantity and sales price. As we know, actual revenue can
differ from budgeted sales revenue for two reasons: (1) changes in sales volume (in
units), and (2) changes in sales price.
We can disentangle the sales volume and sales price variances in the following way:
For Shari, actual revenue was $21,000. This included a 5% price increase relative to
normal prices. Thus, at normal prices, she would have recorded revenue of $20,000 =
$21,000/(1 + 0.05) in May.
Next, we need to determine whether expected costs for actual operations should be
defined at the actual revenue of $21,000 or revenue adjusted for changes in the selling
price (i.e., the $20,000). $21,000 would be appropriate if Sharis variable costs were
something like sales commissions, which vary directly with actual revenue. However,
most of Sharis costs (flowers) are not related to actual revenue. These costs are
expressed as a function of sales only for convenience. (Consider the difficulty of
computing the cost of each type of flower, estimating the sales mix and so on, if we had
to specify costs in terms of the number of flowers sold.).

Thus, Sharis flexible budget cost is appropriately expressed in terms of the revenue
adjusted for price changes, or the $20,000. This implies that her flexible budget variable
cost is $20,000 0.25 = $5,000.
We are now in a position to compute Sharis flexible budget and determine the
components of her total profit variance.

Item
Revenue
Variable costs
Contribution margin
Fixed costs
Profit

Master
Budget
$16,000
4,000
$12,000
6,000
$6,000

Flexible
Budget
$20,000
5,000
$15,000
6,000
$9,000

Actual
results
$21,000
5,800
$15,250
6,300
$8,900

In turn, we can prepare the following budget reconciliation report:

Item
Master budget profit
+ Favorable sales price
variance
+ Favorable sales
volume variance

Amount
$6,000
$1,000

Unfavorable variable
cost variance

($800)

Unfavorable fixed
cost spending variance
= Actual profit

($300)

$3,000

$8,900

Detail
From budget in part [a]
$21,000 (actual) $20,000
(flexible budget)
$9,000 (flexible budget profit)
$6,000 (master budget
profit)
$5,000 (flexible budget
variable costs) $5,800
(actual variable costs)
$6,000 (budgeted fixed costs)
$6,300 (actual fixed costs)
Calculated in part [a]

The difference between Sharis actual and budgeted profit for May is now fully
reconciled.

8.58
From Appendix B, we know that:
Market Share Variance = Actual Market Size (Actual Market Share Budgeted Market
Share) Budgeted Unit Contribution Margin.
Market Size Variance = (Actual Market Size Budgeted Market Size)
Budgeted Market Share Budgeted Unit Contribution Margin.

Unfortunately, we do not have Sharis Budgeted unit contribution margin. However, we

can substitute this with the Contribution Margin Ratio (CMR), if we also define market
size in terms of revenue. Moreover, notice that Sharis budgeted market share of 2%
corresponds to a budgeted market size of $800,000 = $16,000/0.02. Additionally, Sharis
actual market share is 1.6% ($20,000/$1,250,000). Notice that we calculate actual market
share based on the revenue with budgeted prices (i.e., actual revenue the price variance
of $1,000 F.)
Thus, we have:
Market Share Variance = $1,250,000 (0.016 0.020) 0.75 = $3,750 U.
Market Size Variance = ($1,250,000 $800,000) 0.02 0.75 = $6,750 F.
The sum of the market size and share variances is $3,000 F, which equals the sales
volume variance we calculated in the earlier problem.
The additional detail provided by this analysis should give Shari cause for concern. The
market for flowers has experienced a boom. This boom should have increased her profit
by $6,750 relative to budget. However, because she has lost ground in terms of share, she
could only increase profit by $3,000. She needs to figure out why she lost share and find
strategies to regain the lost share. One explanation may relate to the fact that, as
discussed in the previous problem, Shari raised her selling prices by 5 percent.
Note: It is likely that the unfavorable effect of the market share variance is over-stated.
This is because the actual market size would be at actual market prices. Presumably, the
other florists also raised prices, meaning that the market size at budgeted prices would be
lower than $1,250,000. The calculations, however, implicitly assume that Sharis and the
market sales are at budgeted prices. Because we do the correction for Shari (notice her
sales are $20,000 and not $21,000 for the market share calculation) but not the market,
we calculate the market share to be lower than what it truly is.
12.42
a.
Ges current income is 26% * $300,000 = $78,000. With the project, her income therefore
increases to $83,000 = $78,000 + $5,000, and her average assets to$350,000. Her updated ROI is
therefore $83,000 / $350,000 = 23.71%.
b.
Ge would be reluctant to invest in the project because it brings down ROI for the year. Even
though it might be profitable in the long-run, it might have adverse consequences on her
performance evaluation for this year.

12.48
a.
The variable cost for an engine is Rs. 6,000 + 3,000 + 1,000 = Rs. 10,000. Adding the 20 %
mark-up gives a price of Rs. 12,000 per engine.
b.
The full cost is variable cost plus allocated manufacturing overhead. Thus, the full cost for an
engine is Rs. 10,000 + 2,000 = Rs. 12,000. Adding the 10 % mark up gives a price of Rs. 13,200
per engine.
c.
The problem text indicates that there is a ready market for these engines. Therefore, the market
price of Rs. 18,000 per engine is the appropriate transfer price. This is the only price that
properly reflects the opportunity cost of using up the capacity in the Engines Division. A lower,
cost-based price would artificially depress profit at the Engines Division and raise the profit
reported in the Assembly Division.

12.49
a.
Carols variable cost is $108,000 / 18,000 = $6 per meal. This also will be her transfer price.
b.
Carols full cost is ($108,000 + $135,000) = $243,000. Thus, at full cost, her transfer price would
be $13.50 per meal.
c.
The market price per meal is given as $12.00. Thus, if she were to transfer at the market price,
Carol records a loss of $1.50 per meal or $27,000 = 18,000 meals * $1.50 per meal.
d.
The cafeteria should charge the department so that they are aware of the costs of the services
they are consuming. Transferring at market price (the preferred choice) allows management to
see the relative monetary value of the cafeteria. Even though it is making a modest loss,
management might decide to keep the cafeteria open for strategic reasons