PR 66A Contribution margin analysis Obj 5 1 Sales quantity F

PR 6-6A Contribution margin analysis Obj. 5 1. Sales quantity Farr Industries Inc. manufactures only one product. For the year ended December 31, factor, $(2,200,000 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. EXCEL TEMPLATE

Solution

Answer:

1

                                                                                            Contribution Margin Analysis

Amount $

Amount $

Planned Contribution Margin

$5,200,000.00

Effect of change in sales:

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

($2,200,000.00)

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

$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 fact(120,000-130,000)x$165

$1,650,000.00

Unit cost factor
($165-180)x120,000

($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
(120,000-130,000)x$15

$150,000.00

Unit cost factor ($15-$22)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

2

here I am disagree with the president direction because most of the decrease in the variable cost of goods sold is because of the variable cost quantity factor and on the other hand increase in variable selling and admin expanses is due to extras efforts needed to be competitive at higher level of price

Contribution Margin Analysis
	Amount $	Amount $
Planned Contribution Margin		$5,200,000.00
Effect of change in sales:
Sales quantity factor (120,000-130,000)x$220	($2,200,000.00)
Unit price factor ($250 - $220)x120,000	$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 fact(120,000-130,000)x$165	$1,650,000.00
Unit cost factor ($165-180)x120,000	($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 (120,000-130,000)x$15	$150,000.00
Unit cost factor ($15-$22)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