Mathews Company manufactures only one product. For the year ended December 31, t
ID: 2580369 • Letter: M
Question
Mathews Company manufactures only one product. For the year ended December 31, the The excess of sales over variable costs.contribution margin increased by $20,280 from the planned level of $681,720. 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:
Required:
1. Prepare a contribution margin analysis report for the year ended December 31.
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?
a) 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 additional selling efforts needed to be competitive at higher prices.
b) 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.
c) 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.
d) 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.
e) 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.
Actual
Planned Difference—Increase (Decrease) Sales $1,339,000 $1,318,980 $20,020 Variable costs: Variable cost of goods sold $507,000 $533,520 $(26,520) Variable selling and administrative expenses 130,000 103,740 26,260 Total variable costs $637,000 $637,260 $(260) Contribution margin $702,000 $681,720 $20,280 Number of units sold 13,000 14,820 Per unit: Sales price $103 $89 Variable cost of goods sold 39 36 Variable selling and administrative expenses 10 7
Explanation / Answer
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
681,720
Effect of change in sales:
Sales quantity factor
(14820-130,000)*89
-161980
Unit price factor (103-89)*13000
182,000
Total effect of change in sales
20,020
Effect of changes in variable cost of goods sold:
Variable cost quantity factor
(14820-130,000)*36
-65520
Unit cost factor
(39-36)*13000
39000
Total effect of changes in variable cost of goods sold
-26520
Effect of changes in variable selling and administrative expenses:
Variable cost quantity factor
(14820-130,000)*7
-12740
Unit cost factor
(10-7)*13000
39000
26260
Total effect of changes in variable selling and administrative expenses
20,280
Actual contribution margin
702,000
_______________________________
2
At a meeting of the board of directors on January 30, 2013, the president, after reviewing the contribution margin analysis report, made the following comment
a) 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 additional selling efforts needed to be competitive at higher prices.
Mathews Company
Contribution Margin Analysis
For the Year Ended December 31
Planned contribution margin
681,720
Effect of change in sales:
Sales quantity factor
(14820-130,000)*89
-161980
Unit price factor (103-89)*13000
182,000
Total effect of change in sales
20,020
Effect of changes in variable cost of goods sold:
Variable cost quantity factor
(14820-130,000)*36
-65520
Unit cost factor
(39-36)*13000
39000
Total effect of changes in variable cost of goods sold
-26520
Effect of changes in variable selling and administrative expenses:
Variable cost quantity factor
(14820-130,000)*7
-12740
Unit cost factor
(10-7)*13000
39000
26260
Total effect of changes in variable selling and administrative expenses
20,280
Actual contribution margin
702,000