Reference no: EM132655898

Phonix is a manufacturer of audio headsets with two main products, Active (a wireless sports headset) and Lounge (a blue-tooth, noise-cancellation headset).

Sales Performance

Phonix has just started marketing its headsets in Singapore in 2016 with a sales forecast of 12,000 units a year. The sales and operating data for the month of June 2016 is provided below:

Master budget data for June 2016

Total sales of headsets: 1000 units (Active: 300 units, Lounge: 700 units)

Contribution margin per unit:

Active $240
Lounge $400

The actual number of headsets sold in June 2016 is 900 units (540 units of Active and 360 units of Lounge).

Investment Decision

• The manager of one of the production plants of Phonix is considering the purchase of new equipment which would modernize the plant and support Phonix's strategy of competing on the basis of quality and fast customer response.
• Currently, the plant has an asset base of $8,000,000 and net operating profit of $1,200,000. The new equipment is expected to cost $1,000,000 and increase operating income by $100,000 the following year. The plant manager's compensation consists of a base salary plus a bonus based on plant performance. The cost of capital of Phonix is 12%.

Required

Question (a) Calculate the following variances using contribution margin by individual product (Active and Lounge) and also show the combined total of each variance for both products:

i. Sales mix variance
ii. Sales quantity variance
iii. Sales volume variance

Question (b) How would you interpret and explain the reasons for the variances computed in (a) above? What other variances would be useful to further interpret the sales performance, assuming that the required information is available?

Question (c) After further evaluation, the plant manager decided not to proceed with the purchase of the new equipment.

What is the most likely plant performance measure used for his compensation and the reason for his decision? Is his decision congruent with corporate objectives?

Explain and support your answer with relevant computations.