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

Exercise 60

Market Size and Market Share Variances; Foreign Currency Fluctuations Big Spring Brewery (BSB) makes two specialty beers in its micro-brewery: Big Springs Ale and Dark Springs, BSB’s dark beer. Both beers sell for the same price per case in the U.S. market and in the export market. The latter market is primarily European countries. Both beers also have the same variable production costs, though the export product has slightly higher variable costs due to shipping and other distribution costs associated with the export beers. The price, cost, and market information for the two beers are shown below.

	Budget	Actual	BudgetedWt Avg CM
Sales units (cases)
Domestic	22,000	21,575
Export	12,000	15,225
Total	34,000	36,800
Price per case
Domestic	$ 88	$ 8
Export	90	92
Variable cost per case
Domestic	62	62
Export	68	68
Contribution margin
per case
Domestic	26	25
Export	22	24
Total contribution margin
Domestic	$572,000	$539,375	$24.588
Export	$264,000	$365,400
	Industry Budget	Industry Actual
Sales units
Domestic	915,250	924,550
Export	659,500	645,750

The budget was prepared with the expectation that the currency exchange rate would be $1.29 per Euro. The actual average exchange rate for the period reflected the falling dollar, at $1.42 per Euro.

Required

1. What is the market share variance?

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2. What is the market size variance?

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3. Explain possible reasons for these variances, including a consideration of the effect of the change in the currency exchange rate for the dollar and the Euro.

Step 1 of 4

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.