Farr Industries Inc. manufactures only one product. For the year ended December 31, the contribution margin increased by $39,050 from the planned level of $1,389,150. The president 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:

1		Actual	Planned	Difference Increase (Decrease)
2	Sales	$2,779,200.00	$2,756,250.00	$22,950.00
3	Variable costs:
4	Variable cost of goods sold	$1,061,500.00	$1,124,550.00	$(63,050.00)
5	Variable selling and administrative expenses	289,500.00	242,550.00	46,950.00
6	Total variable costs	$1,351,000.00	$1,367,100.00	$(16,100.00)
7	Contribution margin	$1,428,200.00	$1,389,150.00	$39,050.00
8	Number of units sold	19,300.00	22,050.00
9	Per unit:
10	Sales price	$144.00	$125.00
11	Variable cost of goods sold	55.00	51.00
12	Variable selling and administrative expenses	15.00	11.00

Required:

1.	Prepare a contribution margin analysis report for the year ended December 31. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. A colon (:) will automatically appear if it is required. For those boxes in which you must enter subtracted or negative numbers use a minus sign.
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. Lets look into these expenses and get them under control! Also, lets consider increasing the sales price to $160 and continue this favorable tradeoff between higher price and lower volume."
	Do you agree with the presidents comment? Explain.

Labels and Amount Descriptions

Labels
Effect of changes in sales
Effect of changes in selling and administrative expenses
Effect of changes in variable cost of goods sold
For the Year Ended December 31
Amount Descriptions
Actual contribution margin
Contribution margin ratio
Gross profit
Planned contribution margin
Sales mix
Sales quantity factor
Total effect of changes in sales
Total effect of changes in selling and administrative expenses
Total effect of changes in variable cost of goods sold
Unit cost factor
Unit price factor
Variable cost quantity factor

Contribution Margin Analysis

1. Prepare a contribution margin analysis report for the year ended December 31. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. A colon (:) will automatically appear if it is required. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Farr Industries Inc.

Contribution Margin Analysis

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Final Question

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. Lets look into these expenses and get them under control! Also, lets consider increasing the sales price to $160 and continue this favorable tradeoff between higher price and lower volume."

Do you agree with the presidents comment? Explain.

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 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.

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.

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.

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.