Question

1. Soles quantity factor 512.200,000) PR 20-6A Contribution margin analysis Obj. 5 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 presi- dent of Farr Industries Inc. has expressed concern about such a small increase in contribution margin and has requested a follow-up report. ERCE TEMPLATE

Answer 1

1)
FARR INDUSTRIES INC
Contribution Margin Analysis
For the Year Ended December 31
Planned contribution margin		$  5,200,000.00
Sales Quantity Factor  (Actual unit sold-Predicted unit sold) X Planned sale price = (120000-130000)x $220	$(2,200,000.00)
Unit price factor ($250 – $220) × 120,000	$  3,600,000.00
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 ($165 – $180) × 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 ($15 – $22) × 120,000	$   (840,000.00)
Total effect of changes in variable selling and administrative expenses		$    (690,000.00)
Actual contribution margin		$  5,760,000.00
2)
The president’s first statement appears correct taken at face value. The president is incorrect regarding variable cost of goods sold. The majority of the decrease in the variable cost of goods sold was due to the variable cost quantity factor. However, this decrease was offset by a $15.00 increase in the variable cost of goods sold per unit. The contribution margin improved, but some inefficiency reduced the expected amount of improvement from the variable cost quantity factor.
The president is correct in saying that an investigation of the increase in variable selling and administrative expenses is needed. The unit cost factor increased by $15.00, which more than offset the favorable variable cost quantity factor, resultingin an overall decrease in the contribution margin. The increase in the variable selling and administrative expenses is probably due to the additional selling effort required in the face of price increases. It will probably be very difficult to improve the efficiency of this effort as prices go up. Therefore, the president’s suggestion is probably unwarranted. Increasing the price again will require even more selling effort to overcome this negative influence. In addition, there is a limit as to how much price increase the market will likely be able to support.