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Question:
Gonav makes satellite navigation systems for cars. Budgeted sales for the financial year just ended were 900,000 units, based on an expected market size of 9 million units. The actual market size was lower than expected due to the increased use of navigation apps on smart phones. The total market was only 6 million units. Gonav made sales of 700,000 units. The sales volume will be analysed into market size and market share variances. Which of the following correctly describe the nature of these variances?Market size Market share
a. Adverse Adverse
b. Adverse Favourable
c. Favourable Adverse
d. Favourable FavourableI answered C since Gonav has a bigger percentage of the market size – so favourable. With respect to market share, this is the same as sales volume and since they sold less than budgered, the variance is adverse. However, the answer on the book is B.
Can you explain please Mr Moffat?
Many thanks.
The market size was lower (at 6M) than that budgeted for the market (9M) and therefore the market size variance is adverse.
They had budgeted on having a market share of 10% (900,000/9M), and if the market share had stayed at 10% then they would have actually sold 10% of the actual market size, i.e. 10% x 6M = 600,000. However they actually sold 700,000 and so their market share increased and therefore the market share variances is favourable.
(I think you are confusing the words size and share, so I hope my explanation explains it)
I compared absolute figures without looking at relatives. I was also detracted by something I read where market share is the same calculation as sales volume.
Thank you for the explanation.
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