Reference no: EM131007255

Stellar Packaging Products is experiencing an increase in demand for the month of August as a result of Estrella Coffee's comeback in its retail outlets. The following fact pattern forms the basis for the static budget:

Stellar Packaging Products	Variable Costs Total	Fixed Costs Total
Raw materials	$         100,000
Direct manufacturing labor	$         125,000
Indirect manufacturing labor		$           105,000
Factory Insurance & Utilities		$            63,000
Depreciation - Pressroom		$            38,500
Repairs and maintenance - factory		$            28,000
Selling, marketing & distribution expenses	$            40,000	$            80,000
General and administrative expenses		$           120,000

Variable Cost and Volume Data	Plastic
Raw materials = 0.10 lbs x $2.00/lb.	$                    0.20
Direct Labor = 0.025 hr x $10/hr.	$                    0.25
Volume in units	500,000

Sales per unit are $3.00.

Required:

1. In good form, prepare the static budget operating income in contribution format.
2. Suppose actual sales demand increases to 700,000 units for August; assume the units are within the relevant range. Prepare the flexible budget for August in contribution format.
3. Compute and reconcile the sales volume variance for August. Indicate whether the variance is favorable or unfavorable.
4. In a one page composition, provide an explanation for the change in the sales volume variance for August, and identify the elements which give rise to the difference between the flexible and static budgets. Also explain the reason for completing a flexible budget for the period.