At the end of the second quarter Sol's CFO Terence Shaw reviewed the ff results: Per Units Variable Costs Standard 1s Quarter 2011 2nd Quarter 2011 Direct Materials 2.2 Ib.@ $5.70 per Ib. $12.54 2.3 Ib @ $5.80 per Ib. $13.34 2.0Ib @$6.00 per Ib .$12.00 Direct Mfg. labor 0.5 hrs @ 12 per hr. $6.00 0.52 hr @ $12 per hr. $6.24 0.45 hr @14 per hr. $6.30 Other Variable cost $10.00 10.00 9.35 Totals $28.54 29.58 28.15 Static Budget for Each Qtr. based on 2011 1st Qtr. 2011 Results 2nd Qtr. 2011 Results Units 4,000 4,400 4,800 Selling Price $ 70 $72 $ 71.50 Sales $280,000 $316,000 $343,200 Variable Costs Direct Materials 50,160 58,696 57,600 Direct Mfg. labor 24,000 27,456 30,240 Other Variable costs 40,000 44,000 47,280 Total variable costs 114,160 130,152 135,120 Contribution Margin 165,840 186,648 208,080 Fixed Costs 68,000 66,000 68,400 Operating Income $97,840 $120,648 $139,680 Shaw was relieved to see the anticipated savings in material waste and rework seemed to have materialized. But he was concerned that the Union would press hard for higher wages given that actual unit costs came in below standard unit cost and operating income continued to climb.

Required:

1.Prepare a detailed variance analysis of the 2nd Quarter results relative to static budget. Show how much of the improvement in operating Income arose due to changes in sales volume and how much arose for other reasons. Calculate the variances that isolate the effects of price and usage changes in direct materials and direct manufacturing labor.

2.Use the results of requirement 1 to prepare a rebuttal to the union's anticipated demands in light of the second Quarter results.

3. Terence Shaw thinks that the company can negotiate better if it changes the standards. Without performing any calculations, discuss the pros and con of immediately changing standards.