Explain the major reasons for the favorable operating income variance of $71,700.
The first major reason for the favorable operating income variance of $71,700 is that there have been higher sales volume than that forecasted. Essentially, higher sales volume has been responsible for the favorable operating income variance. The actual net sales are $9,657,300, whereas, the budgeted sales volume was $9,645,300. On the other hand unfavorable variance due to operations have actually decreased the favorable operating income variance by $46,000. Specifically, the major reason for the favorable operating income variance is the higher actual sales than planned sales of product D and product E. The planned product sales of product D was 20,000 units instead 36,000 units were sold and the planned sales of product E was 8,000 units, instead 28,000 units were sold. The basis reason for the favorable profit variance was that Midwest's actual sales volume was higher than forecast.
How can an analysis of the profit variance highlight those areas needing management attention?
The analysis of profit variance can show can highlight those areas that need management attention. Particularly in case of Midwest is that the variance due to operations was unfavorable. This means that areas where the costs have been higher than the budgeted costs require corrective measures. If we consider the manufacturing cost, the variable costs show that milk price variance and sugar price variance have been responsible for unfavorable variable costs. Similarly, higher fixed costs of repairs, electricity and water, and spoilage have been responsible for higher actual fixed costs. From the perspective of sales, the actual sales of Product A, B, C, and F have been lower than planned sales. Each of these areas needs management attention. The management needs to address those areas where the costs have