Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 56

Market Size and Share Variances Transpacific Airlines (TPA) budgeted 80 million passenger-miles, or 5 percent of the total market for the year just completed at a contribution margin of 40 cents per mile. The budgeted variable cost is 12 cents per mile.

The operating data for the year show that TPA flew 69.12 million passenger-miles with an average price of 48 cents per passenger-mile. The terrorist activity in the early part of the year in several countries in the region decreased the total miles flown by all airlines for the year by 10 percent. There is no flexible-budget variance for all costs.

Required Assess the effects of the price, sales volume, market size, and market share on the firm’s operating results for the year.

Step 1 of 2

Budget and variance:

Budget is a statement prepared by the management of the business entity which helps them to estimate the expenses, income, receipts, payment, sales and purchases during the period. It is prepared keeping in mind the companies’ objectives and abilities with respect to resources they have. Often businesses deviate from their budgeted figures either in favourable way or unfavourable way. Such deviations are commonly referred to as variances.