Chapter 16, Problem 56P

1

To determine

Prepare a comparative contribution income statement for Incorporation C for the current year that shows the sales volume and selling price variance for each product.

Explanation of Solution

Prepare a comparative contribution income statement for Incorporation C:

	Current year	Sales price variance	Flexible budget	Sales volume variance	Prior Year
Sales
Half inch Model	$43,200	($7,200)	$50,400	$23,100	$27,300
One inch Model	$129,600	$14,400	$115,200	($30,400)	$145,600
	$172,800	$7,200	$165,600	($7,300)	$172,900
Less: Variable Costs
Half inch Model	$21,600		$21,600	$9,900	$11,700
One inch Model	$28,800		$28,800	($7,600)	$36,400
Contribution	$122,400	$7,200	$115,200	($9,600)	$124,800
Less: Fixed Costs	$35,000				$35,000
Operating Income	$87,400				$89,800
Contribution Margin By Product:
Half inch Model	$21,600		$28,800	$13,200	$15,600
One inch Model	$100,800		$86,400	($22,800)	$109,200
Total contribution Margin	$122,400	$7,200	$115,200	($9,600)	$124,800
Less: Fixed Costs	$35,000		$35,000		$35,000
Operating Income	$87,400		$80,200		$89,800

Table (1)

Calculate the sales volume variance:

Product	Calculation	Result
Half Inch	$\left[\left(0.3\times 6,5 00\right)–\left(0.5\times 7,200\right)\right]\times \left(\$14-\$6\right)$	$13,500 (F)
One Inch	$\left[\left(0.7\times 6,500\right)–\left(0.5\times 7,200\right)\right]\times \left(\$32-\$8\right)$	$22,800 (U)

Table (2)

Calculate the selling price variance:

Product	Calculation	Result
Half Inch	$\left(0.5\times 7,200\right)\times \left(\$14-\$12\right)$	$7,200 (U)
One Inch	$\left(0.5\times 7,200\right)\times \left(\$36-\$32\right)$	$14,400 (F)

Table (3)

2

To determine

Compute the sales mix variance and the sales quantity variance for each product, based on contribution margin.

Explanation of Solution

Compute the sales mix variance:

Product	Calculation	Result
Half Inch	$(0.5-\text{0}.3)\times 7,200\times \left(\$14-\$6\right)$	$11,520 (F)
One Inch	$\left(0.5-0.7\right)\times 7,200\times \left(\$32-\$8\right)$	$14,400 (F)

Table (4)

Compute the sales Quantity variance:

Product	Calculation	Result
Half Inch	$\left(7,200–6,500\right)\times \text{0}.3\times \left(\$14-\$6\right)$	$1,680 (F)
One Inch	$\left(7,200–6,500\right)\times 0.7\times \left(\$32-\$8\right)$	$11,760 (F)

Table (5)

3

To determine

Identify whether the price change have the expected results. Explain the reasons.

Explanation of Solution

The sales strategy of reducing the price on the half-inch model was a success in sales volume as sales units improved from 1,950$\left(0.3\times 6,500\right)$ to 3,600$\left(0.5\times 7,200\right)$, an increase of 1,650 units.  The selling price variance was unfavorable due to the price change, a loss of $7,200$\left(\text{\$2 price change}\text{×}\text{3,600 units}\right)$, however the sales volume variance for the product, depending on sales, was favorable, at $23,100$\left(\text{1,650 units}\text{×}\text{\$14}\right)$, for a net positive impact on sales for the half-inch model of $15,900$\left(\$23,100-\$7,200\right)$.

The strategy of increasing price on the one-inch model could have resulted the drop in sales of 950 units $\left(0.7\times 6,500-0.5\times 7,200\right)$, however it  produced a  favorable selling price variance of $14,400, with an unfavorable sales volume variance of $30,400$\left(950\times \$32\right)$, depending on sales, for a net decline of $16,000 in sales dollars. 

The impact of the raised sales volume on variable costs was $9,900$\left(1,650\times \$6\right)$ for the raised sales of the half inch model.  The decreased variable costs due to the reduced sales of the one-inch model was 950 × $8 = $7,600.  

The net effect on operating income of the sales strategies was unfavorable at $2,400$\left(\$89,800-\$87,400\right)$. The net improvement in the half-inch model of $6,000$\left(\$13,200-\$7,200\right)$ was offset by the loss of $8,400$\left(\$22,800-\$14,400\right)$ on the one-inch model.