Question

Contribution Margin Analysis

Mathews Company manufactures only one product. For the year ended December 31, the contribution margin increased by $34,200 from the planned level of $745,800. The president of Mathews Company has expressed some concern about this increase and has requested a follow-up report.

The following data have been gathered from the accounting records for the year ended December 31:

	Actual		Planned		Difference—Increase (Decrease)
Sales	$1,500,000		$1,457,700		$42,300
Variable costs:
Variable cost of goods sold	$570,000		$593,250		$(23,250)
Variable selling and administrative expenses	150,000		118,650		31,350
Total variable costs	$720,000		$711,900		$(8,100)
Contribution margin	$780,000		$745,800		$34,200
Number of units sold	15,000		16,950
Per unit:
Sales price	$100		$86
Variable cost of goods sold	38		35
Variable selling and administrative expenses	10		7

Required:

1. Prepare a contribution margin analysis report for the year ended December 31.

Mathews Company
Contribution Margin Analysis
For the Year Ended December 31
Planned contribution margin		$
Effect of changes in sales:
Sales quantity factor	$
Unit price factor
Total effect of changes in sales
Effect of changes in variable cost of goods sold:
Variable cost quantity factor	$
Unit cost factor
Total effect of changes in variable cost of goods sold
Effect of changes in selling and administrative expenses
Variable cost quantity factor	$
Unit cost factor
Total effect of changes in selling and administrative expenses
Actual contribution margin		$

2. 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 $14 was a favorable tradeoff for decreased sales volume, yet variable cost of goods sold was less than planned and variable selling and administrative expenses were out of control and needed to be investigated. He went on to say that since the favorable tradeoff between higher price and lower sales volume was so successful, the company should consider increasing the sales price to $130.

Do you agree or disagree with the president's proposal and which reason would best explain your decision about the data?

1. Disagree with the president because the majority of the decrease in the variable cost of goods sold was due to the variable cost quantity factor and the increased variable selling and administrative expenses are probably a result of additional selling efforts needed to be competitive at higher prices.
2. Agree with the president because the unit cost factor for the variable selling and administrative cost is greater than the unit cost factor for the variable cost of goods sold, making an investigation necessary.
3. Agree with the president because the total effect of change in sales is greater than the total effect of changes in variable cost of goods sold, making an additional price raise attractive for more profits.
4. Disagree with the president because the contribution margin as a percentage of sales is greater for the planned sales level than the actual sales level, making his concern about variable selling and administrative expenses unwarranted.
5. Agree with the president because the majority of the decrease in the variable cost of goods sold was due to the sales price factor, as well as an increase in the variable selling and administrative expenses as a percentage of sales, making an additional price raise attractive for more profits.

The correct answer is:

Answer 1

Formula used

Price Variance	(Actual Price – Standard Price) × Actual Sales Units
Volume Variance	(Actual Qty - Std Qty) X Std Price

Here is the formula version

Matthew's Company
Contribution Margin Analysis
For the Year Ended December 31
Planned Contribution Margin		745800
Effect of Change in Sales
Sales quantity factor	=(15000-16950)*86
Unit Price Factor	=(100-86)*15000
Total Effect of Change in Sales		=E8+E9
Effect of change in variable cost of goods sold
Variable cost quantity factor	=-(15000-16950)*35
Unit cost factor	=-(38-35)*15000
Total effect of changes in variable cost of goods sold		=E12+E13
Effect of changes in selling and administrative expenses
Variable cost quantity factor	=-(15000-16950)*7
Unit cost factor	=-(10-7)*15000
Total effect of changes in selling and administrative expenses		=E16+E17
Actual contribution margin		=SUM(F5:F18)

Here is the answer version

Matthew's Company
Contribution Margin Analysis
For the Year Ended December 31
Planned Contribution Margin		$   745,800
Effect of Change in Sales
Sales quantity factor	$ (167,700)
Unit Price Factor	$    210,000
Total Effect of Change in Sales		$     42,300
Effect of change in variable cost of goods sold
Variable cost quantity factor	$       68,250
Unit cost factor	$    (45,000)
Total effect of changes in variable cost of goods sold		$     23,250
Effect of changes in selling and administrative expenses
Variable cost quantity factor	$       13,650
Unit cost factor	$    (45,000)
Total effect of changes in selling and administrative expenses		$   (31,350)
Actual contribution margin		$   780,000

2

Option A is correct