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Cafe and Deli operates a chain of 10 hospitals in the Los Angeles area. Its central food-catering facility, Cafeman, prepares and delivers meals to the hospitals. It has the capacity to deliver up to 1,222,400 meals a year. In 2014, based on estimates from each hospital controller, Cafemanbudgeted for 955,000 meals a year. Budgeted fixed costs in 2014 were $1,528,000. Each hospital was charged $ 5.90 per meallong dash$4.30 variable costs plus $1.60 allocated budgeted fixed cost.

Recently, the hospitals have been complaining about the quality of Cafeman's meals and their rising costs. In mid-2014, Cafe and Deli's president announces that all Cafe and Deli hospitals and support facilities will be run as profit centers. Hospitals will be free to purchase quality-certified services from outside the system. Ron Smith, Cafeman's controller, is preparing the 2015 budget. He hears that three hospitals have decided to use outside suppliers for their meals, which will reduce the 2015 estimated demand to 800,000 meals. No change in variable cost per meal or total fixed costs is expected in 2015.

Budgeted fixed costs per meal	2014 Master Budget $1.60	Practical Capasity $1.25	2015 Master Budget $1.91

In 2015, only 764,000 Cafeman meals were produced and sold to the hospitals. Smith suspects that hospital controllers had systematically inflated their 2015 meal estimates.

1.	Recall that Cafeman uses the master-budget capacity utilization to allocate fixed costs and to price meals. What was the effect of production-volume variance on Cafeman's operating income in 2015?
2.	Why might hospital controllers deliberately overestimate their future meal counts?
3.	What other evidence shouldCafe and Deli's president seek to investigate Smith's concerns?
4.	Suggest two specific steps that Smith might take to reduce hospital controllers' incentives to inflate their estimated meal counts.

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