Question

Farr Industries Inc. manufactures only one product. For the year ended December 31, the contribution margin increased by $560,000 from the planned level of $5,200,000. The president of Farr Industries Inc. has expressed concern about such a small increase in contribution margin and has requested a follow-up report.The following data have been gathered from the accounting records for the year ended December 31: 1 Actual Planned Difference — Increase (Decrease) 2 Sales $30,000,000.00 $28,600,000.00 $1,400,000.00 3 Variable costs: 4 Variable cost of goods sold $21,600,000.00 $21,450,000.00 $150,000.00 5 Variable selling and administrative expenses 2,640,000.00 1,950,000.00 690,000.00 6 Total variable costs $24,240,000.00 $23,400,000.00 $840,000.00 7 Contribution margin $5,760,000.00 $5,200,000.00 $560,000.00 8 Number of units sold 120,000.00 130,000.00 9 Per unit: 10 Sales price $250.00 $220.00 11 Variable cost of goods sold 180.00 165.00 12 Variable selling and administrative expenses 22.00 15.00 Required: 1. Prepare a contribution margin analysis report for the year ended December 31. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. A colon (:) will automatically appear if it is required. For those boxes in which you must enter subtracted or negative numbers use a minus sign. 2. At a meeting of the board of directors on January 30, the president, after reviewing the contribution margin analysis report, made the following comment: "It looks as if the price increase of $30 had the effect of increasing sales. However, this was a trade-off since sales volume decreased. Also, variable cost of goods sold per unit increased by $15 more than planned. The variable selling and administrative expenses appear out of control. They increased by $7 per unit more than was planned, which is an increase of over 47% more than was planned. Let’s look into these expenses and get them under control! Also, let’s consider increasing the sales price to $275 and continue this favorable trade-off between higher price and lower volume." Do you agree with the president’s comment? Explain.

Answer 1

Answer:

Farr Industries Inc

            Contribution Margin Analysis

Planned Contribution Margin                                                   $5,200,000.00

Effect of change in sales:

Sales quantity factor                                                                                            (120,000-130,000)x$220                      ($2,200,000)

Unit price factor                                                                                                                ($250 - $220)x120,000                         $3,600,000

Total effect of change in sales                                                 $1,400,000.00

Effect of changes in variable cost of goods sold:

Variable cost quantity factor                                                                                        (130,000-120,000)x $165                    $1,650,000.00

Unit cost factor                                                                                                                   ($180-165) x 120,000                          ($1,800,000.00)

Total effect of changes in                                                                                           variable cost of goods sold                                                      ($150,000.00)

Effect of changes in variable selling and administrative expenses:

Variable cost quantity factor                                                                                                  (130,000-120,000)x $15                   $150,000.00

Unit cost factor                                                                                                   ($22-$15)x 120,000 units                 ($840,000.00)

Total effect of changes in

variable selling and administrative expenses                           ($690,000.00)

Actual contribution margin                                                       $5,760,000.00

I disagree with the President, seeing as though we see that the majority of the decrease in the variable cost of the products sold is due to the variable cost factor and also to the variable sales and administrative expenses because the company made additional sales efforts to stay competitive at increased prices