In 2013, only 806,840 Deliman meals were produced and sold to the hospitals. Smith suspects that hospital controllers had systematically inflated their 2013 meal estimates.

In 9-32

Estimated sales .............. 10,000 books

Beginning inventory ............ 0 books

Average selling price ........... $100 per book

Variable production costs ......... $60 per book

Fixed production costs ..........$120,000 per semester

REQUIRED

1. Recall that Deliman uses the master-budget capacity utilization to allocate fixed costs and to price meals. What was the effect of production-volume variance on Deliman’s operating income in 2013?

2. Why might hospital controllers deliberately overestimate their future meal counts?

3. What other evidence should Deli One’s controller seek to investigate Smith’s concerns?

4. Suggest two specific steps that Deli One’s controller might take to reduce hospital controllers’ incentives to inflate their estimated meal counts.