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Jo Co budgeted that it would sell 20.000 units of its main product, based on an expected total market of 250.000 units, but it has the capacity to increase production if necessary. Demand for the product is price elastic However, after Jo Co produced its budget, one of its competitors became insolvent.
Which of the following is this most likely to give rise to?
Answer is favorable market share variance increases.
They have explained the answer but I am not understanding. Can you explain memThe total market demand is 250,000 units, but this is shared between all of the producers (and at the moment Jo sells 20,000 of them).
If one of the competitors goes bankrupt then the 250,000 units will have to be shared between the producers that are left, and so Jo will be expecting to be able to sell more than 20,000, which will mean that that % share of the total market is likely to be higher.
Tutor, can you help me understanding mathematically. I really understood your answer but if you help me in this it will clear my concepts further.
Market size variance is comparing sales volume planning variance which compares revised and original budget sales volume.
Revised volume will be higher from original budget i.e. 20000.
This is like to be favorable market size variance.
Market share variance is sales volume operational variance which compares revised and actual sales. We are unsure about which will be higher it can be either revised or actual sales.If the size of the overall market increases then we will expect a higher sales volume than we budgeted for.
Separately, if our share of the overall market is higher, then again we will expect a higher sales volume than we budgeted for.
In this question, there is no mention of the overall size of the market changing. However if there are fewer competitors supplying this market, then we are likely to sell more because our share of the market is likely to be higher. (Customers have fewer companies to buy from).
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