Vermont Sky Tours is a small sightseeing tour company based in Burlington, Vermont. The firm specializes in aerial tours of the New England countryside during September and October, when the fall color is at its peak. Until recently, the company had no accounting department. Routine bookkeeping tasks, such as billing, were handled by an individual who had little formal training in accounting. As the business began to grow, however, the owner recognized the need for more formal accounting procedures. Jacque-line Frost was recently hired as the new controller, and she will have the authority to hire an assistant.
During her first week on the job, Frost was given the following performance report. The report was prepared by Red Leif, the company€™s manager of aircraft operations, who was planning to present it to the owner the next morning. €œLook at these favorable variances for fuel and so forth,€ Leif pointed out, as he showed the report to Frost. €œMy operations people are really doing a great job.€ Later that day, Frost looked at the performance report more carefully. She immediately realized that it was improperly prepared and would be misleading to the company€™s owner.

Required:
1. Prepare a columnar flexible budget for Vermont Sky Tours€™ expenses, using air miles as the cost driver at the following activity levels: 32,000 air miles, 35,000 air miles, and 38,000 air miles.
2. In spite of several favorable expense variances shown on the report above, the company€™s September operating income was only about two-thirds of the expected level. Why?
3. Write a brief memo to the manager of aircraft operations explaining why the original variance report is misleading.
4. Prepare a revised expense variance report for September, which is based on the flexible budget prepared in requirement (1).
5. Jacqueline Frost presented the revised expense report to Leif along with the memo explaining why the original performance report was misleading. Leif did not take it well. He complained of Frost€™s €œinterference€ and pointed out that the company had been doing just fine without her. €œI€™m taking my report to the owner tomorrow,€ Leif insisted. €œYours just makes us look bad.€ What are Frost€™s ethical obligations in this matter? What should shedo?

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VERMONT SKY TOURS Performance Repor air miles) Variance Passenger revenue expensesS Aircraft maintenance Total varable expenses. Contribution margin $100,500 Less: Fixed expenses: Depreciation on aircrat 3 salaries.... Selling and administrative Total fxed expenses Uperanng income . : $13,050 U ー .