Reference no: EM131780079

Case- ReelTime distributes DVDs to movie retailers, including dot-coms. ReelTime's top management meets monthly to evaluate the company's performance. Controller Terri Lon prepared the following performance report for the meeting.

REELTIME, INC. Income Statement Performance Report Month Ended July 31, 2007
	Actual Results	Static Budget	Variance
Sales Revenue	$1,640,000	$1,960,000	$320,000 F
Variable Costs:
Variable Costs:	773,750	980,000	206,250 F
Sales Commissions	77,375	107,800	30.425 F
Shipping Expense	42,850	53,900	11,050 F
Total Variable Costs	893,975	1,141,700	247,725 F
Fixed Costs:
Salary Expense	311,450	300,500	10,950 U
Depreciation Expense	208,750	214,000	5,250 F
Rent Expense	128,250	108,250	20,000 U
Advertising Expense	81,100	68,500	12,600 U
Total Fixed Costs	729,550	691,250	38,300 U
Total Expenses	1,623,525	1,832,950	209,425 F
Operating Income	$16,475	$ 127,050	110,575 U

Lon also revealed that the actual sales price of $20 per movie was equal to the budgeted sales price and that there were no changes in inventories for the month.

Management is disappointed by the operating income results. CEO Lyle Nesbitt exclaims, "How can actual operating income be roughly 13% of the static budget amount when there are so many favorable variances?"

Requirements

1. Prepare a more informative performance report. Be sure to include a flexible budget for the actual number of DVDs bought and sold.

2. As a member of ReelTime's management team, which variances would you want investigated? Why?

3. Nesbit believes that many consumers are postponing purchases of new movies until after the introduction of a new format for recordable DVD players. In light of this information, how would you rate the company's performance?