Final answer:
An unfavorable sales volume variance indicates that there has been a decrease in the actual number of units sold compared to what was expected, leading to lower revenues. Various factors such as consumer income and product pricing affect this variance. Companies facing such issues need to carefully analyze their costs and pricing to minimize losses.
Step-by-step explanation:
An unfavorable sales volume variance in operating income suggests a decrease in number of actual units sold when compared to the expected number of units sold. Variance analysis is used to compare actual performance to expected or budgeted amounts. When actual sales volume is less than planned, this results in an unfavorable variance because the firm generates less revenue than anticipated. Factors contributing to an unfavorable variance may include a decrease in consumer income levels, leading to fewer purchases, or anticipated product price increases that may reduce demand.
From an operational perspective, if a company is facing losses, it must decide whether it is better to continue producing—which might mean selling each unit at a price lower than the average variable cost—or to shut down operations. The preferable choice is the one that results in the least financial loss for the company.
Lastly, it is important to monitor the relationship between costs and pricing. Where the price is less than the average cost, the company will not make a profit. Therefore, the business may need to adjust its production quantity or reevaluate its pricing strategy to cover both variable and fixed costs while moving towards profitability.