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: Instructions Prepare a contribution margin analysis report (using the spreadsheet) for the year ended December 31. 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.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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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:

Instructions

  1. Prepare a contribution margin analysis report (using the spreadsheet) for the year ended December 31.
  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.

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