Contribution  margin analysis

 

Dozier Industries Inc. manufactures only one product. For the year ended December 31, the contribution margin increased by $38,500 from the planned level of $1,386,000 The president of Dozier Industries Inc. has expressed some concern about such a small in- crease 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     ..............................................   $ 2,772,000                 $ 2,750,000                     $ 22,000

                                                                          

Less:

Variable cost of goods sold .......................   $ 1,058,750                $ 1,122,000                                                                                                                                    $(63,250) Variable selling and administrative expenses  .....                                                288,750                            242,000                                                                                                                                    46,750 Total     ............................................         $1,347,500                      $1,364,000                                                                                                                                    $(16,500)

Contribution margin  ............................... $1,424,500                      $1,386,000                       $38,500

                                                                           

Number of units sold ...............................      19,250                              22,000

Per unit:

Sales price  .......................................            $144                                $125

Variable cost of goods sold .......................            55                                      51

Variable selling and administrative expenses  .....                 15                                      11

 

Instructions

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 $19 had the effect of decreasing sales volume. However, this was a favorable tradeoff. The variable cost of goods sold was less than planned. Apparently, we are efficiently managing our variable cost of goods sold. However, the variable selling and administrative expenses appear out of control.  Let’s look into these expenses and get them under control! Also, let’s consider increasing the sales price to $160 and continue this favorable tradeoff between higher price and lower   volume.

Do you agree with the president’s comment?   Explain.