Contribution Margin Analysis

Mathews Company manufactures only one product. For the year ended December 31, the contribution margin increased by $16,016 from the planned level of $493,584. 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		DifferenceIncrease (Decrease)
Sales	$988,000		$963,664		$24,336
Variable costs:
Variable cost of goods sold	$374,400		$387,816		$(13,416)
Variable selling and administrative expenses	104,000		82,264		21,736
Total variable costs	$478,400		$470,080		$(8,320)
Contribution margin	$509,600		$493,584		$16,016
Number of units sold	10,400		11,752
Per unit:
Sales price	$95		$82
Variable cost of goods sold	36		33
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 change in sales:
Sales quantity factor	$
Unit price factor
Total effect of change 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 variable selling and administrative expenses:
Variable cost quantity factor	$
Unit cost factor
Total effect of changes in variable 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 $13 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?

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.

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.

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.

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.

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:

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Absorption and Variable Costing Income Statements

During the first month of operations ended July 31, YoSan Inc. manufactured 12,100 flat panel televisions, of which 11,400 were sold. Operating data for the month are summarized as follows:

Sales		$1,881,000
Manufacturing costs:
Direct materials	$943,800
Direct labor	278,300
Variable manufacturing cost	242,000
Fixed manufacturing cost	121,000	1,585,100
Selling and administrative expenses:
Variable	$148,200
Fixed	68,200	216,400

Required:

1. Prepare an income statement based on the absorption costing concept.

YoSan Inc.
Absorption Costing Income Statement
For the Month Ended July 31
		$
Cost of goods sold:
	$
		$
		$

2. Prepare an income statement based on the variable costing concept.

YoSan Inc.
Variable Costing Income Statement
For the Month Ended July 31
		$
Variable cost of goods sold:
	$
		$
		$
Fixed costs:
	$
		$

3. The income from operations reported under costing exceeds the income from operations reported under costing by the difference between the two, due to manufacturing costs that are deferred to a future month under costing.

Classify Costs

Following is a list of various costs incurred in producing replacement automobile parts. With respect to the production and sale of these auto parts, classify each cost as either variable costs, fixed costs, or mixed costs.

1. Oil used in manufacturing equipment

2. Plastic

3. Property taxes, $165,000 per year on factory building and equipment

4. Salary of plant manager

5. Cost of labor for hourly workers

6. Packaging

7. Factory cleaning costs, $6,000 per month

8. Metal

9. Rent on warehouse, $10,000 per month plus $25 per square foot of storage used

10. Property insurance premiums, $3,600 per month plus $0.01 for each dollar of property over $1,200,000

11. Straight-line depreciation on the production equipment

12. Hourly wages of machine operators

13. Electricity costs, $0.20 per kilowatt-hour

14. Computer chip (purchased from a vendor)

15. Pension cost, $1.00 per employee hour on the job

Sales Mix and Break-Even Sales

Dragon Sports Inc. manufactures and sells two products, baseball bats and baseball gloves. The fixed costs are $312,000, and the sales mix is 60% bats and 40% gloves. The unit selling price and the unit variable cost for each product are as follows:

Products	Unit Selling Price		Unit Variable Cost
Bats	$60		$50
Gloves	150		90

a. Compute the break-even sales (units) for the overall enterprise product, E. units

b. How many units of each product, baseball bats and baseball gloves, would be sold at the break-even point?

Baseball bats	units
Baseball gloves	units

Contribution Margin and Contribution Margin Ratio

For a recent year, McDonald's Company-owned restaurants had the following sales and expenses (in millions):

Sales	$39,800
Food and packaging	$15,142
Payroll	10,000
Occupancy (rent, depreciation, etc.)	7,668
General, selling, and administrative expenses	5,800
	$38,610
Income from operations	$1,190

Assume that the variable costs consist of food and packaging, payroll, and 40% of the general, selling, and administrative expenses.

a. What is McDonald's contribution margin? Round to the nearest million. (Give answer in millions of dollars.) $ million

b. What is McDonald's contribution margin ratio? %

c. How much would income from operations increase if same-store sales increased by $2,400 million for the coming year, with no change in the contribution margin ratio or fixed costs? Round your answer to the closest million. $ million

Break-Even Sales and Sales to Realize Income from Operations

For the current year ended October 31, Friedman Company expects fixed costs of $633,600, a unit variable cost of $66, and a unit selling price of $98.

a. Compute the anticipated break-even sales (units). units

b. Compute the sales (units) required to realize income from operations of $147,200. units

Relevant Range and Fixed and Variable Costs

Vogel Inc. manufactures memory chips for electronic toys within a relevant range of 88,400 to 142,800 memory chips per year. Within this range, the following partially completed manufacturing cost schedule has been prepared:

Complete the cost schedule below. When computing the cost per unit, round to two decimal places. Round all other values to the nearest dollar.

Memory chips produced	88,400	109,200	142,800
Total costs:
Total variable costs	$33,592	d. $	j. $
Total fixed costs	37,128	e.	k.
Total costs	$70,720	f. $	l. $
Cost per unit
Variable cost per unit	a. $	g. $	m. $
Fixed cost per unit	b.	h.	n.
Total cost per unit	c. $	i. $	o. $