Cost Management
Cost Management
8th Edition
ISBN: 9781259917028
Author: BLOCHER, Edward
Publisher: Mcgraw-hill Education,
Question
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Chapter 16, Problem 56P

1

To determine

Prepare a comparative contribution income statement for Incorporation C for the current year that shows the sales volume and selling price variance for each product.

1

Expert Solution
Check Mark

Explanation of Solution

Prepare a comparative contribution income statement for Incorporation C:

 Current yearSales price varianceFlexible budgetSales volume variancePrior Year
Sales     
Half inch Model$43,200($7,200)$50,400$23,100$27,300
One inch Model$129,600$14,400$115,200($30,400)$145,600
 $172,800$7,200$165,600($7,300)$172,900
Less: Variable Costs     
Half inch Model$21,600 $21,600$9,900$11,700
One inch Model$28,800 $28,800($7,600)$36,400
  Contribution$122,400$7,200$115,200($9,600)$124,800
Less: Fixed Costs$35,000   $35,000
  Operating Income$87,400   $89,800
      
Contribution Margin By Product:
Half inch Model$21,600 $28,800$13,200$15,600
One inch Model$100,800 $86,400($22,800)$109,200
Total contribution Margin$122,400$7,200$115,200($9,600)$124,800
Less: Fixed Costs$35,000 $35,000 $35,000
Operating Income$87,400 $80,200 $89,800

Table (1)

Calculate the sales volume variance:

ProductCalculationResult
Half Inch[(0.3×6,5 00)(0.5×7,200)]×($14$6)$13,500 (F)
One Inch[(0.7×6,500)(0.5×7,200)]×($32$8)$22,800 (U)

Table (2)

Calculate the selling price variance:

ProductCalculationResult
Half Inch(0.5×7,200)×($14$12)$7,200 (U)
One Inch(0.5×7,200)×($36$32)$14,400 (F)

Table (3)

2

To determine

Compute the sales mix variance and the sales quantity variance for each product, based on contribution margin.

2

Expert Solution
Check Mark

Explanation of Solution

Compute the sales mix variance:

ProductCalculationResult
Half Inch(0.50.3)×7,200×($14$6)$11,520 (F)
One Inch(0.50.7)×7,200×($32$8)$14,400 (F)

Table (4)

Compute the sales Quantity variance:

ProductCalculationResult
Half Inch(7,2006,500)×0.3×($14$6)$1,680 (F)
One Inch(7,2006,500)× 0.7×($32$8)$11,760 (F)

Table (5)

3

To determine

Identify whether the price change have the expected results. Explain the reasons.

3

Expert Solution
Check Mark

Explanation of Solution

The sales strategy of reducing the price on the half-inch model was a success in sales volume as sales units improved from 1,950(0.3×6,500) to 3,600(0.5×7,200), an increase of 1,650 units.  The selling price variance was unfavorable due to the price change, a loss of $7,200($2 price change×3,600 units), however the sales volume variance for the product, depending on sales, was favorable, at $23,100(1,650 units×$14), for a net positive impact on sales for the half-inch model of $15,900($23,100$7,200).

The strategy of increasing price on the one-inch model could have resulted the drop in sales of 950 units (0.7×6,5000.5×7,200), however it  produced a  favorable selling price variance of $14,400, with an unfavorable sales volume variance of $30,400(950×$32), depending on sales, for a net decline of $16,000 in sales dollars. 

The impact of the raised sales volume on variable costs was $9,900(1,650×$6) for the raised sales of the half inch model.  The decreased variable costs due to the reduced sales of the one-inch model was 950 × $8 = $7,600.  

The net effect on operating income of the sales strategies was unfavorable at $2,400($89,800$87,400). The net improvement in the half-inch model of $6,000($13,200$7,200) was offset by the loss of $8,400($22,800$14,400) on the one-inch model.

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