Movies Galore distributes DVDs to movie ­retailers, including online ­retailers. Movies Galore’s top management meets monthly to evaluate the company’s ­performance. Controller Allen Walsh prepared the following performance report for the meeting:

Walsh also revealed that the actual sale price of $ 20 per movie was equal to the budgeted sale price and that there were no changes in inventories for the month. Management is disappointed by the operating income results. CEO Jilinda Robinson exclaims, “How can actual operating income be roughly 12% of the static budget amount when there are so many favorable variances?”

Requirements

1. Prepare a more informative performance report. Be sure to include a flexible budget for the actual number of DVDs bought and sold.

2. As a member of Movies Galore’s management team, which variances would you want investigated? Why?

3. Robinson believes that many consumers are postponing purchases of new ­movies until after the introduction of a new format for recordable DVD players. In light of this information, how would you rate the company’s performance?

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MOVIES GALORE Static Budget Performance Report For the Month Ended July 31, 2014 Actual Static Results Budget Variance Sales Revenue $ 1,640,000 $ 1,960,000 $ 320,000 U Variable Costs: Cost of Goods Sold 775,000 980,000 205,000 F Sales Commissions 77,000 107,800 30,800 F Shipping Cost 43,000 53,900 10,900 F Total Variable Costs 895,000 1,141,700 246,700 F Contribution Margin 745,000 818,300 73,300 Fixed Costs: Salaries 311,000 300,500 10,500 U Depreciation 209,000 214,000 5,000 F Rent 129,000 108,250 20,750 U Advertising 81,000 68,500 12,500 U Total Fixed Costs 730,000 691,250 38,750 U Operating Income 15,000 $ 127,050 $112,050 U