from the accounting records for the year ended December 31: Financial Categories Actual Planned Difference Sales $ 30,000,000 $ 28,600,000 $ 1,400,000.00 Variable costs: Variable cost of goods sold $ 21,600,000 $ 21,450,000 $ 150,000 Variable selling and admin expenses $ 2,640,000 $ 1,950,000 $ 690,000 Total variable costs $ 24,240,000 $ 23,400,000 $ 840,000 Contribution Margin $ 5,760,000 $ 5,200,000 $ 560,000
L. Farrah 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 L.
Farrah 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:
Financial Categories Actual Planned Difference
Sales $ 30,000,000 $ 28,600,000 $ 1,400,000.00
Variable costs:
Variable cost of goods sold $ 21,600,000 $ 21,450,000 $ 150,000
Variable selling and admin expenses $ 2,640,000 $ 1,950,000 $ 690,000
Total variable costs $ 24,240,000 $ 23,400,000 $ 840,000
Contribution Margin $ 5,760,000 $ 5,200,000 $ 560,000
Number of units sold 120,000 130,000
Per unit
Sales price $ 250 $ 220
Variable cost of goods sold $ 180 $ 165
Variable selling and admin expenses $ 22 $ 15
a. Prepare a contribution margin analysis report for the year ended December 31.
b. 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
Contribution margin refers to the concept of evaluating the number of extra expenses a company has to bear in order to produce an extra unit of a product.
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