PR 20-6A Contribution margin analysis Obj. 5 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 presi- dent 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: Difference- Increase Actual Planned (Decrease) Sales $30,000,000 $ 28,600,000 $1,400,000 Variable costs: Variable cost of goods sold. $21,600,000 $ 21,450,000 $ 150,000 Variable selling and administrative 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 Variable selling and administrative expenses 22 15 165 2. Instructions 1. Prepare a contribution margin analysis report for the year ended December 31. At a meeting of the board of directors on January 30, the president, after review. ing 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. Abo, 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 in crease of over 47% more than was planned. Let's look into these expenses and get them under controll Also, let's con sider increasing the sales price to 5275 and continue this favorable trade-off between higher price and lower volume. Do you agree with the president's comment? Explain. Contribution Margin Analysis For the Year Ended December 31 $ 5,200,000 $ 2,200,000) 3,600,000 $ 1,400,000 Planned contribution margin Effect of change in sales: Sales quantity factora Unit price factorb Total effect of change in sales Effect of changes in variable cost of goods sold: Variable cost quantity factorc Unit cost factord Total effect of changes in variable cost of goods sold Effect of changes in variable selling and administrative expenses: Variable cost quantity factore Unit cost factorf Total effect of changes in variable selling and admin. exp. Actual contribution margin $ 1,650,000 (1,800,000) $ (150,000) $ 150,000 (840,000) (690,000) $ 5,760,000 a Difference in units sold Planned unit sales nice a Difference in units sold Planned unit sales price Sales quantity factor $ (2,200,000 b Difference in sales price Actual units sold Unit price factor $3,600,000 C Difference in units sold Planned variable cost of goods sold Variable cost quantity factor $1,650,000 d Difference in unit variable cost of goods sold L'Actual units sold Unit cost factor $ (1,800,000) e Difference in units sold Planned unit variable selling and admin. exp. Variable cost quantity factor $ 150,000 C Difference in units sold Planned variable cost of goods sold Variable cost quantity factor $1,650,000 d Difference in unit variable cost of goods sold Actual units sold Unit cost factor $(1,800,000) e Difference in units sold Planned unit variable selling and admin. exp. Variable cost quantity factor $ 150,000 f Difference in unit variable selling and admin. exp. Actual units sold Variable cost quantity factor $ (840,000)