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	118,800	$28
Product S	145,300	21
Product T	17,500	19

At the end of the year, actual sales revenue for Product R and Product S was $3,190,200 and $2,986,800, respectively. The actual price charged for Product R was $26 and for Product S was $19. Only $9 was charged for Product T to encourage more consumers to buy it, and actual sales revenue equaled $418,950 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	$	Unfavorable	$	Favorable
Product S	$	Unfavorable	$	Favorable
Product T	$	Unfavorable	$	Favorable

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

	Actual sales
Product R	122700		=3190200/26
Product S	157200		=2986800/19
Product T	46550		=418950/9
1
	Sales price variance
Product R	245400	Unfavorable	=122700*(28-26)
Product S	314400	Unfavorable	=157200*(21-19)
Product T	465500	Unfavorable	=46550*(19-9)
	Sales volume variance
Product R	109200	Favorable	=28*(122700-118800)
Product S	249900	Favorable	=21*(157200-145300)
Product T	551950	Favorable	=19*(46550-17500)
2
Penetration pricing strategy is being followed which involves charging low prices initially