1.
Prepare the comparative contribution income statement for Incorporation GG for the current year that shows the volume and selling price variance for each product based on contribution margin.
1.

Explanation of Solution
Given information:
Particulars | Current year | Prior Year |
Sales units | 3,500 | 3,500 |
Sales Mix for each Product: | ||
Quality | 50% | 40% |
Heavy Duty | 50% | 60% |
Price: | ||
Quality | $1,080 | $1,200 |
Heavy Duty | $1,440 | $1,600 |
Variable Cost per Unit: | ||
Quality | $800 | $800 |
Heavy Duty | $950 | $950 |
Fixed cost | $700,000 | $550,000 |
Table (1)
Prepare the comparative contribution income statement for Incorporation GG for the current year:
Sales | Current year | Sales Price Variance | Flexible Budget | Sales Volume Variance | Prior Year |
Quality | $1,890,000 | ($210,000) | $2,100,000 | $420,000 | $1,680,000 |
Heavy duty | $2,520,000 | ($280,000) | $2,800,000 | ($560,000) | $3,360,000 |
Total sales | $4,410,000 | ($490,000) | $4,900,000 | ($140,000) | $5,040,000 |
Less: Variable Costs | $3,062,500 | $3,062,500 | ($52,500) | $3,115,000 | |
Contribution | $1,347,500 | $1,837,500 | ($87,500) | $1,925,000 | |
Less: Fixed Costs | $700,000 | $550,000 | |||
Operating income | $647,500 | $1,375,000 | |||
Contribution Margin by Product: | |||||
Quality | $490,000 | ($210,000) | $700,000 | $140,000 | $560,000 |
Heavy duty | $857,500 | ($280,000) | $1,137,500 | ($227,500) | $1,365,000 |
Contribution Margin | $1,347,500 | ($490,000) | $1,837,500 | ($87,500) | $1,925,000 |
Less: Fixed Cost | $700,000 | $550,000 | |||
Operating Income | $647,500 | $1,375,000 |
Table (2)
Summary of the selling price variance and volume variances based on contribution is as follows:
Sales | Sales Price Variance | Sales Volume Variance |
Quality | ($210,000) | $140,000 |
Heavy duty | ($280,000) | ($227,500) |
Total | ($490,000) | ($87,500) |
Table (3)
2.
Compute the sales mix variance and the sales quantity variance for each product, based on contribution margin.
2.

Explanation of Solution
Compute the sales mix variance and the sales quantity variance for each product, based on contribution margin:
Particulars | Sales Mix variance | Sales Quantity variance | Sales Volume Variance |
Quality | $140,000 | $0 | $140,000 |
Heavy duty | ($227,500) | $0 | ($227,500) |
($87,500) | $0 | ($87,500) |
Table (4)
Working note 1: Calculate the Sales Mix variance:
Particulars | Calculations | Result |
Quality | $140,000 (F) | |
Heavy duty | $227,500 (U) |
Table (5)
Working Note 2: Calculate the Sales Quantity variances:
As there is no change in the total sales units for both Products, the sales quantity variance is zero.
3.
Identify whether the price change and increase in advertising have the expected results. Explain.
3.

Explanation of Solution
The total unfavorable variance is $490,000 which is expected due to huge losses reflected in the higher variances in selling price. There was a huge unfavorable volume variance of $87,500, which is due to the changes made in product mix and no adjustment in the quantity of sales. The volume variance consists of mix and quantity variances. There was a good mix variance for the Quality product of $140,000 because of its increase from 40% to 50% of the total sales. In any case, there was an unfavorable mix variance of $227,500 for the Heavy-Duty product due to the decrease in the mix from 60% to 50%.
Unfortunately for Incorporation GG, the Quality product has a lower budgeted contribution margin of $400
4.
Identify the methods that Incorporation GG adopt to become more competitive in the current and coming year.
4.

Explanation of Solution
The reduction in operating income from $1,375,000 to $647,500 from proceeding the present year is a significant concern. As shown in the issue, the firm is beginning to examine approaches to reduce variable costs for the coming year. A helpful method to begin this planning is to utilize components of target costing and persistent improvement. While not beginning without any preparation, a fundamental target costing idea is to see approaches to redesign the item or manufacturing process to reduce
Another methodology is to utilize the productivity analyses acquainted right now to decide financial and operational partial productivity measures for the key manufacturing cost factors and to screen these measures to look for development.
Another methodology an understudy may recommend is to utilize ABC to all the more likely comprehend the drivers of backhanded costs. The ABC analysis would then be able to be utilized with ABM to distinguish non-value-added costs.
Finally,
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Chapter 16 Solutions
COST MANAGEMENT (W/CONNECT ACCESS)(LOOS
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