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Paynesville Corporation manufactures and sells a preservative used in food and drug manufacturing. The company...

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Accounting

Paynesville Corporation manufactures and sells a preservative used in food and drug manufacturing. The company carries no inventories. The master budget calls for the company to manufacture and sell 140,000 liters at a budgeted price of $375 per liter this year. The standard direct cost sheet for one liter of the preservative follows.

Direct materials (2 pounds @ $24) $48

Direct labor (0.5 hours @ $64) 32

Variable overhead is applied based on direct labor hours. The variable overhead rate is $220 per direct-labor hour. The fixed overhead rate (at the master budget level of activity) is $110 per unit. All non-manufacturing costs are fixed and are budgeted at $3.2 million for the coming year.

At the end of the year, the costs analyst reported that the sales activity variance for the year was $1,110,000 unfavorable.

The following is the actual income statement (in thousands of dollars) for the year.

Sales revenue $50,638

Less variable costs

Direct materials 5,268

Direct labor 1,210

Variable overhead 1,130

Total variable costs $7,608

Contribution margin $43,030

Less fixed costs

Fixed manufacturing overhead 1,250

Non-manufacturing costs 1,430

Total fixed costs $2,680

Operating profit $40,350

Required:

Construct a profit variance analysis.

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