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Case- ReelTime distributes DVDs to movie retailers, including dot-coms. ReelTime's top management meets monthly to evaluate the company's performance. Controller Terri Lon prepared the following performance report for the meeting.
REELTIME, INC. Income Statement Performance Report Month Ended July 31, 2007
Actual Results
Static Budget
Variance
Sales Revenue
$1,640,000
$1,960,000
$320,000 F
Variable Costs:
773,750
980,000
206,250 F
Sales Commissions
77,375
107,800
30.425 F
Shipping Expense
42,850
53,900
11,050 F
Total Variable Costs
893,975
1,141,700
247,725 F
Fixed Costs:
Salary Expense
311,450
300,500
10,950 U
Depreciation Expense
208,750
214,000
5,250 F
Rent Expense
128,250
108,250
20,000 U
Advertising Expense
81,100
68,500
12,600 U
Total Fixed Costs
729,550
691,250
38,300 U
Total Expenses
1,623,525
1,832,950
209,425 F
Operating Income
$16,475
$ 127,050
110,575 U
Lon also revealed that the actual sales price of $20 per movie was equal to the budgeted sales price and that there were no changes in inventories for the month.
Management is disappointed by the operating income results. CEO Lyle Nesbitt exclaims, "How can actual operating income be roughly 13% 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 ReelTime's management team, which variances would you want investigated? Why?
3. Nesbit 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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