Portia Carter is the president of a company that owns sixmultiplex movie theaters. Carter has delegated decision-makingauthority to the theater managers for all decisions except thoserelating to capital expenditures and film selection. The theatermanagers’ compensation depends on the profitability of theirtheaters. Max Burgman, the manager of the Park Theater, had thefollowing master budget and actual results for the month.
Master Actual
Budget Results
Tickets sold 120,000 480,000
Revenue–tickets $ 840,000 $ 880,000
Revenue–concessions 480,000 330,000
Total revenue $1,320,000 $1,210,000
Controllable variable costs
Concessions 120,000 99,000
Direct labor 420,000 330,000
Variable overhead 540,000 550,000
Contribution margin $ 240,000 $ 231,000
Controllable fixed costs
Rent 55,000 55,000
Other administrative expenses 45,000 50,000
Theater operating income $ 140,000 $ 126,000
1. Assuming that the theaters are profit centers, prepare aperformance report for the Park Theater using the chart below.Include a flexible budget. Determine the variances between actualresults, the flexible budget, and the master budget. (25points)
Actual Flexible Master
Results Variance Budget Variance Budget
Tickets sold 110,000 ( ) 120,000
Revenue–tickets $ 880,000 ( ) ( ) $ 840,000
Revenue–concessions 330,000 ( ) ( ) 480,000
Total revenue $1,210,000 ( ) $1,320,000
Controllable variable costs
Concessions 99,000 ( ) ( ) 120,000
Direct labor 330,000 ( ) ( ) 420,000
Variable overhead 550,000 ( ) ( ) 540,000
Contribution margin $ 231,000 ( ) ( ) $ 240,000
Controllable fixed costs
Rent 55,000 55,000
Other administrative expenses 50,000 ( ) 45,000
Theater operating income $ 126,000 ( ) ( ) $ 140,000
2. Evaluate Burgman’s performance as a manager.
3. Assume that the managers are assigned responsibility for capitalexpenditures and that the theaters are thus investment centers.Park Theater is expected to generate a desired ROI of at least 6percent on average invested assets of $2,000,000.
a. Compute the theater’s return on investment and residual incomeusing the chart below.
Actual Flexible Master
ROI ÷ ÷ ÷
= 0.00% = 0.00% = 0.00%
Residual income – ( 0% x ) – ( 0% x ) – ( 0% x )
= = =
b. Using the ROI and residual income, evaluate Burgman’sperformance as a manager.
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