Answer 1: Breakeven point
If Waltham Motors Division sells 13,326 units, it will breakeven. But why Waltham incurred net losses when it sold more than 13,326 units in May? The unfavorable cost variances (see answer 2 and 3) and Waltham’s high operating leverage were major reasons for its financial problems. Waltham’s operating leverage is 3.85 times, which indicates that the operating income is very sensitive to changes in sales.
Answer 2: Total cost per unit
The budgeted cost per unit is $42.93, and the actual cost per unit is $49.51. When figuring the cost per unit, we include all the cost, including selling and administration costs. The actual cost per unit exceeded the budgeted amount because of the following: * Waltham sold less units of motors compared to the budgeted quantities. Therefore, the actual overhead per unit exceeded the budget amount due to decreased denominator. * Waltham incurred higher director labor cost per unit and direct material cost per unit compared to the budgeted amounts.
Answer 3: Performance report
Waltham should divide the unfavorable static budget variance for operating income into two parts: a flexible budget variance of $20,356 U and a sales-volume variance of $78,044 U. To gain further insight, Waltham should subdivide the flexible budget variance for direct cost inputs into more detailed variances. Price variance for direct materials is $4,200 F, and quantity variance for direct materials is $5,600 U. Price variance for direct labor is $5,600 U, and quantity variance for direct materials is $16,400 U.
Answer 4: Summary of variance analysis
The summary of variances highlights three main effects:
* Waltham sold 400 fewer units than budgeted, resulting in an unfavorable sale volume variance of $78,044. Sales declined probably because Waltham did not adapt quickly to changes in customer preference and probably because quality problems developed that...