Damerow Credit Services produces reports for consumers about their credit ratings. The company’s standard contribution margins average 70% of dollar sales, and average selling prices are $50 per report. Average productivity is four reports per hour. Some employees work for sales commissions and others for an hourly rate. The static budget for 20X1 had predicted processing 800,000 reports, but Damerow processed only 700,000 reports.
Fixed costs of rent, supervision, advertising, and other items were budgeted at $22 million, but the budget was exceeded by $600,000 because of extra advertising in an attempt to boost revenue.
There were no variances from the average selling prices, but the actual commissions paid to preparers and the actual productivity per hour resulted in flexible-budget variances (i.e., total price and quantity variances) for variable costs of $900,000 unfavorable.
The president of Damerow was unhappy because the budgeted income of $6 million was not achieved. He said, “Sure, we had unfavorable variable-cost variances, but our income was down far more than that. Please explain why.”
Explain why the budgeted income was not attained. Use a presentation similar to Exhibit 8-6, page 316. Enough data have been given to permit you to construct the complete exhibit by filling in the known items and then computing the unknowns. Complete your explanation by summarizing what happened, using no more than three sentences.