The president of Lawrence Motors Inc. is upset. The year's budget projected that the firm would earn $2,499,900. The recently audited financial statements show an actual loss of $2,440,000. The president wants to know what happened.

As a long time employee of Lawrence Motors, you are aware that the firm manufactures taxicabs to order (the firm does not carry a finished goods inventory).

Late last year, the firm occupied its new facilities, which were designed to have the capacity to produce 100,000 taxis per year.

This is larger than is currently necessary, but management thought it would be cheaper to build the excess capacity then, rather than have to add facilities later.

The master budget for this year called for the production of 65,000 taxis at a cost of $227 million. This assumes materials costs of $1,800 per unit; labor of $900 per unit; variable overhead of $200 per unit, and $600 for fixed costs per unit.

Fixed costs were budgeted at $9 million for advertising, $11 million for administration, and $19 million for depreciation on its facilities.

Revenues for the year were expected to be $299,999,900, or about $3,538.46 per taxi.

During the year, orders were received to produce 68,000 taxis, but trouble with the new facilities limited production to 63,000 units.

Income statement for the year:

Revenues $221,760,000 Materials 112,000,000

Comments: The selling price was determined by the market. The direct materials price variance was $2 million favorable. The direct labor usage variance was $3 million unfavorable The variable overhead efficiency (usage) variance was $50,000 unfavorable.

Labor Variable overhead

Advertising Administration Capacity costs Net income

60,000,000 13,000,000

9,000,000 10,200,000 20,000,000 (2,440,000)

Required: 

carefully explain the difference between budgeted and actual income. Attribute the responsibility for the differences by (a) calculating all variances that can be determined and by (b) interpreting each variance.