Let's say a production manager that makes custom jet airplanes expects to make and sell two airplanes during 2016. Each airplane sells for $10 million and costs $6 million to make, which consists of $5 million of fixed costs and $1 million of variable costs. If the manager beats his budget, he will get a $300,000 bonus. During 2016 the company only managed to make and sell one airplane, and the actual manufacturing costs incurred included $5 million of fixed costs and $1.2 million of variable costs.

a. Did the manager earn his bonus if the static budget was used? Explain your answer or show your calculations.
b. Did the manager earn his bonus if a flexible budget was used? Explain your answer or show your calculations.

(1) No

(2) No

Explanation:

1. No, according to the static budget manager will receive a commission when he sale 2 airplanes, but he sold only 1 airplane during the year 2016.

Total Estimated Revenue = 2 × $10,000,000 = $20,000,000

Total Estimated Cost = 2 × ($5,000,000 + $1,000,000) = $12,000,000

Total Estimated Profit = Total Estimated Revenue - Total Estimated Cost

= $20,000,000 - $12,000,000 = $8,000,000

Actual Revenue = $10,000,000

Actual cost = $5,000,000 + $1,200,000 = $6,200,000

Actual profit = Actual Revenue - Actual cost

= $10,000,000 - $6,200,000 = $3,800,000

2. Manager will not get bonus because Firm does not meet his Target of $8,000,000.

flexible budget only use to measure Individual cost not efficiency of manager.

um sure