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

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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.