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.
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REELTIME, INC. Income Statement Performance Report Month Ended July 31, 2007
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Actual Results
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Static Budget
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Variance
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Sales Revenue
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$1,640,000
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$1,960,000
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$320,000 F
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Variable Costs:
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Variable Costs:
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773,750
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980,000
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206,250 F
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Sales Commissions
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77,375
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107,800
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30.425 F
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Shipping Expense
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42,850
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53,900
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11,050 F
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Total Variable Costs
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893,975
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1,141,700
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247,725 F
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Fixed Costs:
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Salary Expense
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311,450
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300,500
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10,950 U
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Depreciation Expense
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208,750
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214,000
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5,250 F
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Rent Expense
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128,250
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108,250
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20,000 U
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Advertising Expense
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81,100
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68,500
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12,600 U
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Total Fixed Costs
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729,550
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691,250
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38,300 U
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Total Expenses
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1,623,525
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1,832,950
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209,425 F
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Operating Income
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$16,475
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$ 127,050
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110,575 U
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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?