Chapter 16, Problem 56P

1.

To determine

Based on contribution margin, calculate a comparative contribution income statement for the Incorporation, CI for the current year that shows volume and sales price variances for each commodity.

Explanation of Solution

Operational control is the power to carry out those functions of orders over subordinate forces concerning the organization and use of instructions and compels the assignment of tasks, the assignment of goals and the giving of the instructive path requisite for the task.

A cost variance is the difference between the cost actually incurred and the amount of costs money earmarked or scheduled that should have been imposed. These variances establish a mandatory part of many reporting tools for the management.

The variance in sales volume reflects the difference in contribution margin or operating earnings between a flexible budget and the master budget. The variance in the sales volume for a single product firm can be determined by multiplying the budgeted contribution margin per product unit times the difference between the number of units sold and the budgeted units sold for sale.

The variation in selling price is the difference between actual sales revenue for a year and the sales revenue for the duration in the flexible budget.

The comparative contribution income statement for the Incorporation, CI for the current year is shown below:

		Current year		Prior year
Sales Units		7,200		6,500
Sales mix for each product
Half-inch model		50%		30%
One -inch model		50%		70%
Price
Half-inch model		$ 12.00		$ 14.00
One -inch model		$36.00		$32.00
Variable Cost per unit
Half-inch model		$ 6.00		$ 6.00
One -inch model		$ 8.00		$ 8.00
Fixed Cost		$ 35,000		$ 35,000
		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
Total sales		$172,800		$7,200		$165,600		$ (7,300)		172,900
Less: Variable costs		$ 50,400						$ (48,100)		$48,100
Contribution		$ 122,400				$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				$ 15,600
One -inch model		$100,800				$86,400				$109,200
Total Contribution margin		$122,400		$7,200		$115,200		$ (9,600)		$124,800
Less: Fixed costs		35,000								35,000
Operating Income		$87,400								$89,800

Calculate the volume variances for half-inch product:

$\begin{array}{c}\text{Half -inch}=\left[\left(\text{.3}\times \text{6,5 00}\right)\text{–}\left(\text{.5}\times \text{7,200}\right)\right]\times \left(\text{\$14}-\text{\$6}\right)\\ =\$13,200\text{ F}\end{array}$

Calculate the volume variances for one-inch product:

$\begin{array}{c}\text{One -inch}=\left[\left(\text{.7}\times \text{6,5 00}\right)\text{–}\left(\text{.5}\times \text{7,200}\right)\right]\times \left(\text{\$32}-\text{\$8}\right)\\ =\$22,800\text{ U}\end{array}$

Calculate the selling price variances for half-inch product:

$\begin{array}{c}\text{Half -inch}=\left(\text{.5}\times \text{7,200}\right)\times \left(\text{\$14}-\text{\$12}\right)\\ =\$7,200\text{ U}\end{array}$

Calculate the selling price variances for one-inch product:

$\begin{array}{c}\text{One -inch}=\left(\text{.5}\times \text{7,200}\right)\times \left(\text{\$36}-\text{\$32}\right)\\ =\$14,400\text{ F}\end{array}$

2.

To determine

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

Explanation of Solution

Operational control is the power to carry out those functions of orders over subordinate forces concerning the organization and use of instructions and compels the assignment of tasks, the assignment of goals and the giving of the instructive path requisite for the task.

A cost variance is the difference between the cost actually incurred and the amount of costs money earmarked or scheduled that should have been imposed. These variances establish a mandatory part of many reporting tools for the management.

Variances may be characterized as the difference between the cost or income for an activity budgeted or planned and the actual cost or income for the activity.

The variation in the sales mix is the consequence that the relative proportions of goods differ from the proportions budgeted have on the duration overall contribution margin.

Sales quantity variance reflects on variations between the number of units sold and the number of units budgeted for sale and tests the impact on operating results of these variations.

Compute the sales mix variance and the sales quantity variance for the each given product:

Product	Sales Mix Variance	Sales Quantity Variance	Volume Variance
Half-inch	$11,520	$ 1,680	$ 13,200
One -inch	(34,560)	11,760	(22,800)
Total	$ (23,040)	$13,440	$9,600

Calculate the sales mix variances for half-inch product:

$\begin{array}{c}\text{Half -inch}=\left[\left(\text{0}\text{.5}-0.\text{3)}\times \text{7,200}\right)\right]\times \left(\text{\$14}-\text{\$6}\right)\\ =\$11,520\text{ F}\end{array}$

Calculate the sales mix variances for one-inch product:

$\begin{array}{c}\text{One -inch}=\left[\left(\text{0}\text{.5}-0.7\text{)}\times \text{7,200}\right)\right]\times \left(\text{\$32}-\text{\$8}\right)\\ =\$34,560\text{ U}\end{array}$

Calculate the sales quantity variances for half-inch product:

$\begin{array}{c}\text{Half -inch}=\left[\left(\text{7,200}-\text{6,500}\right)\right]\times .3\times \left(\text{\$14}-\text{\$6}\right)\\ =\$1,680\text{ F}\end{array}$

Calculate the sales quantity variances for one-inch product:

$\begin{array}{c}\text{One -inch}=\left[\left(\text{7,200}-\text{6,500}\right)\right]\times .7\times \left(\text{\$14}-\text{\$6}\right)\\ =\$11,760\text{ F}\end{array}$

3.

To determine

Mention that the price change will have the expected results or not. Explain the reason for if so or not.

Explanation of Solution

Operational control is the power to carry out those functions of orders over subordinate forces concerning the organization and use of instructions and compels the assignment of tasks, the assignment of goals and the giving of the instructive path requisite for the task.

A cost variance is the difference between the cost actually incurred and the amount of costs money ear marked or scheduled that should have been imposed. These variances establish a mandatory part of many reporting tools for the management.

Variances may be characterized as the difference between the cost or income for an activity budgeted or planned and the actual cost or income for the activity.

On the half-inch model, the selling strategy of reducing price was a success in sales volume as sales units increased from 1,950 (.3 $\times$ 6,500) to 3,600 (.5 $\times$ 7,200), an increase of 1,650 units. The market price variance was unfavorable due to the price shift, a loss of $7,200 (= $2 price change $\times$ 3,600 units), but the sales volume variance for the device, based on demand, was favorable at $23,100 (= 1,650 units $\times$ $14) for a net positive demand impact of $23,100 − $ 7,200 = $15,900 for the half-inch model. The one-inch price increase plan may have triggered a decrease in revenue of 950 units (.7 $\times$ 6,500 −.5 $\times$ 7,200), but it created a favorable selling price variance of $14,400, with an unfavorable market volume variance of $30,400 (= 950 $\times$ $32), based on pricing, for a net reduction of $16,000 in sales dollars. For the increased sales of the half-inch model, the expense of the additional selling volume on variable costs was $9,900 = 1,650 $\times$ $6. Credit to the reduced one-inch model sales the decreased variable cost was 950 $\times$ $8 = $7,600.

The net impact of the sales tactics on operating income was unfavorable at $2,400 = $89,800 − $ 87,400. The net gain of $6,000 (= $13,200 − $ 7,200) on the half-inch model was offset by a loss of $8,400 (= $22,800 − $14,400) on the one-inch model.