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

Exercise 57

Market Size and Market Share Variances for Small Business Diane’s Designs is a small business run out of its owner’s house. For the past six months, the company has been selling two products, a welcome sign and a birdhouse. The owner has been concerned about the company’s marketing effectiveness. The master budget and actual results for March of this year follow:

	Master Budget
	Welcome Sign	Birdhouse	Total
Units	50	25	75
Sales	$1,000	$250	$1,250
Variable costs	890	1 20	1,010
Contribution margin	$ 110	$130	$ 240
Fixed costs	75	75	150
Operating income	$ 35	$ 55	$ 90

	Actual Results
	Welcome Signs	Birdhouses	Total
Units	45	35	80
Sales	$675	$420	$1,095
Variable costs	580	270	850
Contribution margin	$ 95	$150	$245
Fixed costs	75	75	150
Opera ting income	$ 20	$ 75	$95

The total market for welcome signs for the last six months are 3,000 budgeted and 3,000 actual. Diane expected the total market for birdhouses to be 200 units per month; the actual volume for the entire market, however, turned out to be only 175 units per month.

Required (rounding differences are acceptable)

1. Compare Diane’s Designs’ market share for welcome signs and birdhouses.

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2. What is the market share contribution margin variance?

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3. What is the market size contribution margin variance?

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4. Explain possible reasons for these variances.

Step 1 of 11

“Market share measures the firm’s share of the market in a particular market. Its variance compares the firm’s actual market share to its budgeted market share and measures the effect of this difference on firm’s total contribution margin”.

Market size on the other hand measures the size in units for the industry. Its variance analyses the effect of the difference between actual market size and budgeted market size on firm’s total contribution margin.