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Recently, the hospitals have been complaining about the quality of Topman's

meals and their rising costs. In mid-2014, Top Catering's president announces that all Top Catering

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,Topman'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 780,000 meals. No change in variable cost per meal or total fixed costs is expected in 2015.

	2014 Master	Practical	2015 Master
	Budget	Capacity	Budget
Budgeted fixed costs per meal	$1.56	$1.17	$1.95

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Top Catering operates a chain of 10 hospitals in the Los Angeles area. Its central food-catering facility,

Topman, prepares and delivers meals to the hospitals. It has the capacity to deliver up to 1,300,000

meals a year. In 2014, based on estimates from each hospital controller, Topman budgeted for 975,000

meals a year. Budgeted fixed costs in 2014 were $1,521,000.

Each hospital was charged $6.26 per meal-$4.70 variable cost plus $1.56 allocated budgeted fixed cost.

In 2015, only 760,500 meals were produced and sold to the hospitals. Smith suspects that hospital controllers had systematically inflated their 2015 meal estimates.

Requirement 1. Recall that Topman uses the master-budget capacity utilization to allocate fixed costs and to price meals. What was the effect of production-volume variance on Topman's operating income in

2015?

Determine the formula, then compute the effect of production-volume variance on Topman operating income in 2015.

			Fixed cost allocated using master-budget capacity				Production-
	Bud. fixed costs	- (	Bud. fixed cost per meal	x	Capacity level meals	) =	volume variance
		- (		x		) =		U

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