Question:
Preparing an income statement performance report Network Technologies manufactures capacitors for cellular base stations and other communication applications. The company's July 2012 flexible budget income statement shows output levels of 7,000, 8,500, and 10,500 units. The static budget was based on expected sales of 8,500 units.
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NETWORK TECHNOLOGIES
Flexible Budget Income Statement
Month Ended July 31, 2012
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Per Unit
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By Units (Capacitors)
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7,000
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8,500
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10,500
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Sales revenue
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$25
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$ 175,000
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$ 212,500
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$ 262,500
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Variable expenses
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$13
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91,000
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110,500
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136,500
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Contribution margin
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$ 84,000
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$ 102,000
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$ 126,000
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Fixed expenses
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56,000
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56,000
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56,000
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Operating income
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$ 28,000
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$ 46,000
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$ 70,000
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The company sold 10,500 units during July, and its actual operating income was as follows:
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NETWORK TECHNOLOGIES
Income Statement
Month Ended July 31, 2012
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Sales revenue
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$269,500
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Variable expenses
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141,500
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Contribution margin
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$128,000
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Fixed expenses
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57,000
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Operating income
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$71,000
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Requirements
1. Prepare an income statement performance report for July 2012.
2. What was the effect on Network's operating income of selling 2,000 units more than the static budget level of sales?
3. What is Network's static budget variance? Explain why the income statement performance report provides more useful information to Network's managers than the simple static budget variance. What insights can Network's managers draw from this performance report?