# Question: A division budgeted an operating profit of 3 000 on sales

A division budgeted an operating profit of \$3,000 on sales of \$8,000 and costs of \$5,000. However, at the beginning of the period one of the divisionâ€™s machines broke down and could not be fixed until the end of the period. When the machine broke, the division manager determined that there were two feasible alternatives: First, production and sales could be cut back by 25%, reducing sales to \$6,000 and costs to \$4,000. (Note that costs are not reduced by 25% because some of the costs are fixed.)
Second, a replacement machine could be obtained and installed, allowing sales to be maintained at \$8,000 but increasing costs to \$6,500. The division manager analyzed the alternatives and concluded that revenues less costs would be greater if sales were reduced (\$6,000 less \$4,000 = \$2,000 operating profit) than if the replacement machine was obtained (\$8,000 less \$6,500 = \$1,500 operating profit). The manager, therefore, chose not to replace the machine. However, because revenue was lower than planned by \$2,000, there is an unfavorable revenue variance of \$2,000. Comment on how the unfavorable revenue variance should be interpreted in evaluating the performance of the manager.

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