Stellar Packaging Products is experiencing an increase in demand for the month of August as a result of Estrella Coffee’s comeback in its retail outlets. The following fact pattern forms the basis for the static budget: Stellar Packaging Products Variable Costs Total Fixed Costs Total Raw materials $ 100,000 Direct manufacturing labor $ 125,000 Indirect manufacturing labor $ 105,000 Factory Insurance & Utilities $ 63,000 Depreciation – Pressroom $ 38,500 Repairs and maintenance – factory $ 28,000 Selling, marketing & distribution expenses $ 40,000 $ 80,000 General and administrative expenses $ 120,000 Variable Cost and Volume Data Plastic Raw materials = 0.10 lbs x $2.00/lb. $ 0.20 Direct Labor = 0.025 hr x $10/hr. $ 0.25 Volume in units 500,000 Sales per unit are $3.00.

Required: In good form, prepare the static budget operating income in contribution format.

Suppose actual sales demand increases to 700,000 units for August; assume the units are within the relevant range.

Prepare the flexible budget for August in contribution format.

Compute and reconcile the sales volume variance for August.

Indicate whether the variance is favorable or unfavorable. In a one page composition, provide an explanation for the change in the sales volume variance for August, and identify the elements which give rise to the difference between the flexible and static budgets.

Also explain the reason for completing a flexible budget for the period.