PR 20-6A Contribution margin analysis Costello Industries Inc. manufactures only one product. For the year ended December 31, 2012, the contribution margin increased by $19,800 from the planned level of $888,800. The president of Costello Industries Inc. has expressed some concern about such a small increase and has requested a follow-up report. The following data have been gathered from the accounting records for the year ended December 31, 2012: Difference - Increase Actual Planned (Decrease) Sales $1,771,000 $1,760,000 $ 11,000 Less: Variable cost of goods sold. $ 677,600 $ 712,800 $ (35,200) Variable selling and administrative expenses 184,800 158,400 26,400 Total ....... $ 862,400 $ 871,200 $ (8,800) Contribution margin $ 908,600 $ 888,800 $ 19,800 Number of units sold 15,400 17,600 Per unit: Sales price...... $115.00 $100.00 Variable cost of goods sold ..... 44.00 40.50 Variable selling and administrative expenses 12.00 9.00 Instructions 1. Prepare a contribution margin analysis report for the year ended December 31, 2012. 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: It looks as if the price increase of $15 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 $130 and continue this favorable tradeoff between higher price and lower volume. Do you agree with the president's comment? Explain. $ 888,800 COSTELLO INDUSTRIES INC. Contribution Margin Analysis For the Year Ended December 31, 2012 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 factors Unit cost factor Total effect of changes in variable selling and admin. exp. Actual contribution margin TIN Difference in units sold x Planned unit sales price Sales quantity factor 2 Difference in sales price x Actual units sold Unit price factor 3 Difference in units sold x Planned variable cost of goods sold Variable cost quantity factor * Difference in unit variable cost of goods sold x Actual units sold Unit cost factor 5 Difference in units sold x Planned unit variable selling and admin. exp. Variable cost quantity factor Difference in unit variable selling and admin. exp. * Actual units sold Variable cost quantity factor