Milltown Company specializes in selling used cars. During the month, the dealership sold 30 cars at an average price of $15,800 each. The budget for the month was to sell 28 cars at an average price of $16,800. Compute the dealership’s sales price variance for the month. Multiple Choice
a. $33,600 unfavorable.
b. $30,000 favorable.
c. $33,600 favorable.
d. $30,000 unfavorable
e. $10,800 favorable.
The Correct Answer and Explanation is:
To compute Milltown Company’s sales price variance, we use the following formula:
Sales Price Variance = (Actual Selling Price – Budgeted Selling Price) × Actual Units Sold
Step-by-step Calculation:
- Actual Selling Price = $15,800
- Budgeted Selling Price = $16,800
- Actual Units Sold = 30 cars
Now plug the values into the formula: Sales Price Variance=(15,800−16,800)×30\text{Sales Price Variance} = (15,800 – 16,800) \times 30Sales Price Variance=(15,800−16,800)×30 Sales Price Variance=(−1,000)×30=−30,000\text{Sales Price Variance} = (-1,000) \times 30 = -30,000Sales Price Variance=(−1,000)×30=−30,000
Since the result is negative, this is an unfavorable variance of $30,000.
Correct Answer: d. $30,000 unfavorable
Explanation (300+ words):
Sales price variance is a financial metric used by businesses to assess how changes in the actual selling price of goods or services, compared to the budgeted price, have impacted overall revenue. It plays a crucial role in performance evaluation and strategic decision-making.
In this scenario, Milltown Company budgeted for each car to sell at $16,800, but the actual average selling price was only $15,800. This means each car was sold for $1,000 less than expected. Despite selling 2 more cars than budgeted (30 actual vs. 28 budgeted), the focus of sales price variance is solely on the price difference applied to the actual quantity sold.
The formula captures how much revenue was lost or gained solely due to price differences, not volume. Multiplying the $1,000 shortfall per car by the 30 cars sold results in a $30,000 unfavorable variance, meaning the company earned $30,000 less than it would have if the cars had been sold at the budgeted price.
This unfavorable variance could signal several issues: increased competition forcing lower prices, a drop in consumer demand, or perhaps pricing errors. It’s a red flag for management, as pricing is a critical component of profitability. Even though the company sold more cars than planned (which might produce a favorable sales volume variance, a different metric), the lower price negatively impacted revenue.
Understanding and analyzing such variances allows businesses to pinpoint problem areas and adjust pricing strategies, marketing efforts, or cost controls to improve financial performance in future periods.