Calculate standard pretax income

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Reference no: EM132753386

Question - Reconciling Standard to Actual Income, Performance Evaluation, Budget Sales: Games (35,000 DVDs) $616,000

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 company is organized along three product lines: games, business programs, and educational programs. The average standard selling price for each is $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, 2,000 business programs, and 10,000 educational programs. Actual results are as follows:

Business (4,000 DVDs) 198,000

Educational (11,000 DVDs) 220,000

Total sales 1,034,000

Variable costs (50,750 DVDs) 106,575

Fixed costs 533,500

Pretax income $393,925

REQUIRED -

A. Calculate standard pretax income and then reconcile it to actual pretax income by calculating the contribution margin sales mix variance, revenue sales quantity variance, sales price variance, materials price and quantity variances, and fixed cost spending variance.

B. A new marketing manager was hired during the period. The manager changed prices and redirected sales efforts.

I. Discuss whether one or more of the preceding variances are relevant to evaluating the performance of the new marketing manager.

II. 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 DVD 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.

Reference no: EM132753386

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