planning and operational variance

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February 11, 2019 at 5:14 pm #504801
reem1589
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A company sets its sales budget based on an average price of $14per unit and sales volume of 250,000 units. Competition was more intense than expected and the company only achieved sales of 220,000 and had to sell at a discounted price of $12.50 per unit. The company was unable to reduce costs so profit per unit fell from $4 per unit to $2.50 per unit. It was estimated that the total market volume grew by 10% from1,000,000 units to 1,100,000 units.
Required:
(a) Calculate the sales price and volume variances.
(b) Analyse the volume variances into market share and market size.
(c) Discuss whether the price variance is a planning or operational variance.

In the following question please explain how to attempt part b and c.
February 12, 2019 at 6:50 pm #504943
f6ali
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(b) Based on Budgeted Sales of 250,000 units, we can say that company has a market share of 25%, i.e of the total demand of 1 million units in the market, 25% demand is fulfilled by the company.

The overall market has grown by 10%, but the company’s share of the market remained same, meaning company’s demand is still 25% of the new total demand. Hence,

Revised Standard Sales = 1,100,000*25% = 275,000 units

Market Size Variance = (250,000 – 275,000)*$4 = $100,000 Favorable

Market Share Variance = (275,000 – 220,000)*$4 = $220,000 Adverse

Note: Sales Volume Planning Variance is also called Market Size Variance, Sales Volume Operational Variance is also called Market Share Variance.
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