Reference no: EM132688125

You have been approached by a potential client who could bring you considerable business. She says, "I'd like to find an alternative vendor for my future orders of 5,000/yr., but their pricing must be competitive."

Your CFO has supplied you with the following information. Current product standard costs are as follows:Selling price per unit: $5,000
$1,400/unit direct material
$400/unit direct labor
$200/unit variable overhead
$200/unit fixed overhead (this figure is the result of the budgeted fixed overhead of $2,000,000 and budgeted sales volume of 10,000 units)
Income Tax rate = 40%

• The board of directors has requested a thorough presentation to determine whether taking on this potential customer is a good idea. Assume that your factory is fully operational and that you will not have any learning curve impacts.

Question 1: What is meant by cost variance?

Question 2: What is an effective way to incorporate variance analysis in the budget process?

Question 3: What are the differences between labor and material variances?

Question 4: How is a quantity variance different from a rate variance?

Question 5: What are the subcomponents of fixed overhead?

Question 6: What are the subcomponents of variable overhead?

Question 7: What is the lowest possible price you could offer to this potential customer (you know that you have sufficient capacity without working overtime and without adding any new equipment to make this order)?