Question

3. The Omega Corporation manufactures two types of vacuum cleaners: the ZENITH for commercial building use and the House-Helper for residences. Budgeted and actual operating data for the year 2018 are as follows: Static Budget ZENITH House-Helper Total Number sold 15,000 60,000 75,000 Contribution margin $3,750,000 $12,000,000 $15,750,000 Actual Results ZENITH House-Helper Total Number sold 16,500 38,500 55,000 Contribution margin $6,200,000 $10,200,000 $16,400,000

Assume that Omega Corporation operates in Midwest market. The total Midwest market is expected to be 500,000 units in sales volume for 2018. The actual total Midwest market for 2018 was 440,000 units in sales volume. Required: Label all variances as either favorable (F) or unfavorable (UF)

a. Calculate the total contribution margin for the flexible budget.

b. Determine the total static-budget variance, the total flexible-budget variance, and the total sales-volume variance in terms of the contribution margin.

c. Calculate the market-share and market size variances in contribution margin terms for the Omega Corporation for 2018

Answer 1

Requirement a: Compute flexible-budget contribution margin as follows

Flexible-budget contribution margin   = Actual units × Budgeted contribution margin

Zenith                                                  = 16,500 units × ($3,750,000 ÷ 15,000 units)

                                                            = $4,125,000

House-Helper                                      = 38,500 units × ($12,000,000 ÷ 60,000 units)

                                                            = $7,700,000

Total flexible-budget contribution margin      = $4,125,000 + $7,700,000

= $11,825,000

Requirement b: Compute total static-budget, total flexible-budget and sales-volume variance as follows

Static-budget variance            = Total static-budget contribution − Total actual contribution

= $15,750,000 − $16,400,000

= $650,000 Favorable (F)

Flexible-budget variance = Total flexible-budget contribution − Total actual contribution

= $11,825,000 − $16,400,000

= $4,575,000 Favorable (F)

Sales-volume variance = Total static-budget contribution − Total flexible-budget contribution

= $15,750,000 − $11,825,000

= $3,925,000 Unfavorable (UF)

Requirement c: Compute the market-share and market size variances as follows

Market-share variance = (Actual market size × Actual market share × Budgeted contribution margin per unit) − (Actual market size × Budgeted market share × Budgeted contribution margin per unit)

                                    = (55,000 × 12.5% × $210) − (55,000 × 15% × $210)

                                    = $288,750 Unfavorable (UF)

Market-size variance = (Actual market size × Budgeted market share × Budgeted contribution margin per unit) − (Budgeted market size × Budgeted market share × Budgeted contribution margin per unit)

                                    = (55,000 × 15% × $210) − (75,000 × 15% × $210)

                                    = $630,000 Unfavorable (UF)

Note:

Actual market share    = 55,000 units ÷ 440,000 units

                                    = 12.5%          

Budgeted market share           = 75,000 units ÷ 500,000 units

                                                = 15%

Composite budgeted unit contribution margin = $15,750,000 ÷ 75,000 units

                                                                        = $210 per unit