Suppose a chain of KFC franchises in Beijing had budgeted sales for 2009 of RMB 7.3 million (where RMB stands for the Chinese unit of currency, officially the renminbi, also called the yuan). Cost of goods sold and other variable costs were expected to be 60 per cent of sales. Budgeted annual fixed costs were RMB 1.8 million. A strong Chinese economy caused actual 2009 sales to rise to RMB 9.2 million and actual profits to increase to RMB 1,570,000. Fixed costs in 2009 were as budgeted. The franchisee was pleased with the increase in profit.

1. Compute the sales-activity variance and the flexible-budget variance for income for 2009.

What can the franchisee learn from these variances?

2. Suppose that in 2010 the Chinese economy weakened, and the franchise’s sales fell back to the RMB 7.3 million level. Given what happened in 2009, what do you expect to happen to profits in 2010?