Johnson Company had planned for operating income of $10 million in the master budget with a contribution margin of $3 million, but actually achieved operating income of only $7 million and a contribution margin of $2.5 million.
A) The static-budget variance for operating income is $3 million favorable.
B) The static-budget variance for operating income is $3 million unfavorable.
C) The flexible-budget variance for operating income is $3 million favorable.
D) The flexible-budget variance for operating income is $3 million unfavorable.

Question

Quizplus · Accepted Answer

The static-budget variance for operating income is computed as the difference between the budgeted operating income and the actual operating income. In this case, the budgeted operating income was $10 million, but the actual operating income was $7 million, which is $3 million unfavorable. Therefore, choice B is the correct answer. The flexible-budget variance for operating income is computed as the difference between the flexible budget and the actual operating income. Since the question does not provide any information about the flexible budget, choices C and D cannot be determined.

Johnson Company Had Planned for Operating Income of $10 Million