Question

RTI Company’s master budget calls for production and sale of 19,200 units for $96,000; variable costs of $42,240; and fixed costs of $21,200. During the most recent period, the company incurred $33,200 of variable costs to produce and sell 21,200 units for $86,200. During this same period, the company earned $26,200 of operating income.

(Do not round intermediate calculations. Round final answer to the nearest whole dollar.)
Required:
1. Determine the following for RTI Company:
a. Flexible-budget operating income.
b. Flexible-budget variance, in terms of contribution margin.
c. Flexible-budget variance, in terms of operating income.
d. Sales volume variance, in terms of contribution margin.
e. Sales volume variance, in terms of operating income.

Answer 1

The calculation involves determining the flexible-budget operating income, contribution margin variance, operating income variance, and sales volume variances for contribution margin and operating income based on both the master budget and actual results.

Step-by-step explanation:

Calculating Variances and Operating Income for RTI Company

To determine the flexible-budget operating income and variances for RTI Company, we first need to calculate the flexible budget, which is a budget that adjusts or flexes with changes in volume or activity. To calculate it, we use the actual number of units sold (21,200 units) and the original per unit budget data.

The master budget anticipated a sale of 19,200 units at the total revenue of $96,000, which gives a per unit revenue of $5 ($96,000 / 19,200 units). Applying this unit revenue to the actual sold units, the flexible budget revenue is $106,000 (21,200 units x $5/unit).

The variable cost per unit in the master budget is $2.2 ($42,240 / 19,200 units). Multiplying by the actual units sold gives a flexible budget variable cost of $46,640 (21,200 units x $2.2/unit).

Since fixed costs do not vary with the level of output, we will use the master budget fixed cost of $21,200.

a. Flexible-budget operating income:

The flexible-budget operating income is the difference between the flexible budget revenue and the sum of flexible budget variable and fixed costs:

Flexible-budget operating income = $106,000 (revenue) - $46,640 (variable costs) - $21,200 (fixed costs) = $38,160.

b. Flexible-budget variance, in terms of contribution margin:

The contribution margin in the flexible budget would be $106,000 - $46,640 = $59,360.
Actual contribution margin is $86,200 (revenue) - $33,200 (variable costs) = $53,000.
Flexible-budget contribution margin variance = $59,360 - $53,000 = $6,360 unfavorable.

c. Flexible-budget variance, in terms of operating income:

Flexible-budget operating income = $38,160 (as calculated earlier).
Actual operating income is $26,200.
Flexible-budget operating income variance = $38,160 - $26,200 = $11,960 unfavorable.

d. Sales volume variance, in terms of contribution margin:

The sales volume variance for contribution margin is the difference between the master budget contribution margin and the flexible-budget contribution margin. For the master budget contribution margin, we take original sales of $96,000 - original variable costs $42,240 = $53,760. The flexible-budget contribution margin is $59,360 (calculated above).
Sales volume variance for contribution margin = $59,360 - $53,760 = $5,600 favorable.

e. Sales volume variance, in terms of operating income:

For operating income, the master budget expected $32,560 ($96,000 - $42,240 - $21,200), while the flexible-budget operating income is $38,160. Hence, the sales volume variance in operating income = $38,160 - $32,560 = $5,600 favorable.