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L. Farrah Industries Inc. manufactures only one product. For the year ended December 31, the contribution margin increased by $560,000 from the planned level of $5,200,000. The president of L. Farrah 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:

L. Farrah Industries Inc. manufactures only one product. For the year ended December 31, the contribution margin increased by $560,000 from the planned level of $5,200,000. The president of L. Farrah 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:

Cornerstones of Cost Management (Cornerstones Series)
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter2: Basic Cost Management Concepts
Section: Chapter Questions
Problem 22E: Ellerson Company provided the following information for the last calendar year: During the year,...
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Problems L. Farrah Industries Inc. manufactures only one product. For the year ended December 31, the contribution margin increased by $560,000 from the planned level of $5,200,000. The president of L. Farrah 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: Financial Categories Actual Planned Difference Sales 30,000,000 $ 28,600,000 $ 1,400,000.00 Variable costs: Variable cost of goods sold 21,600,000 $ 21,450,000 $ 150,000 Variable selling and admin expenses 2,640,000 1,950,000 690,000 Total variable costs 24,240,000 23,400,000 840,000 Contribution Margin 5,760,000 5,200,000 560,000 Number of units sold 120,000 130,000 Per unit Sales price 2$ 250 220 Variable cost of goods sold Variable selling and admin expenses 2$ 2$ $ 2$ 180 165 22 15 a. Prepare a contribution margin analysis report for the year ended December 31. b. 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 $30 had the effect of increasing sales. However, this was a trade-off since sales volume decreased. Also, variable cost of goods sold per unit increased by $15 more than planned. The variable selling and administrative expenses appear out of control. They increased by $7 per unit more than was planned, which is an increase of over 47% more than was planned. Let's look into these expenses and get them under control. Also, let's consider increasing the sales price to $275 and continue this favorable trade-off between higher price and lower volume." C. Do you agree with the president's comment? Explain.
Transcribed Image Text:Problems L. Farrah Industries Inc. manufactures only one product. For the year ended December 31, the contribution margin increased by $560,000 from the planned level of $5,200,000. The president of L. Farrah 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: Financial Categories Actual Planned Difference Sales 30,000,000 $ 28,600,000 $ 1,400,000.00 Variable costs: Variable cost of goods sold 21,600,000 $ 21,450,000 $ 150,000 Variable selling and admin expenses 2,640,000 1,950,000 690,000 Total variable costs 24,240,000 23,400,000 840,000 Contribution Margin 5,760,000 5,200,000 560,000 Number of units sold 120,000 130,000 Per unit Sales price 2$ 250 220 Variable cost of goods sold Variable selling and admin expenses 2$ 2$ $ 2$ 180 165 22 15 a. Prepare a contribution margin analysis report for the year ended December 31. b. 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 $30 had the effect of increasing sales. However, this was a trade-off since sales volume decreased. Also, variable cost of goods sold per unit increased by $15 more than planned. The variable selling and administrative expenses appear out of control. They increased by $7 per unit more than was planned, which is an increase of over 47% more than was planned. Let's look into these expenses and get them under control. Also, let's consider increasing the sales price to $275 and continue this favorable trade-off between higher price and lower volume." C. Do you agree with the president's comment? Explain.
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