Chapter 16, Problem 57P

1.

To determine

Prepare the comparative contribution income statement for Incorporation GG for the current year that shows the volume and selling price variance for each product based on contribution margin.

Explanation of Solution

Given information:

Particulars	Current year	Prior Year
Sales units	3,500	3,500
Sales Mix for each Product:
Quality	50%	40%
Heavy Duty	50%	60%
Price:
Quality	$1,080	$1,200
Heavy Duty	$1,440	$1,600
Variable Cost per Unit:
Quality	$800	$800
Heavy Duty	$950	$950
Fixed cost	$700,000	$550,000

Table (1)

Prepare the comparative contribution income statement for Incorporation GG for the current year:

Sales	Current year	Sales Price Variance	Flexible Budget	Sales Volume Variance	Prior Year
Quality	$1,890,000	($210,000)	$2,100,000	$420,000	$1,680,000
Heavy duty	$2,520,000	($280,000)	$2,800,000	($560,000)	$3,360,000
Total sales	$4,410,000	($490,000)	$4,900,000	($140,000)	$5,040,000
Less: Variable Costs	$3,062,500		$3,062,500	($52,500)	$3,115,000
Contribution	$1,347,500		$1,837,500	($87,500)	$1,925,000
Less: Fixed Costs	$700,000				$550,000
Operating income	$647,500				$1,375,000
Contribution Margin by Product:
Quality	$490,000	($210,000)	$700,000	$140,000	$560,000
Heavy duty	$857,500	($280,000)	$1,137,500	($227,500)	$1,365,000
Contribution Margin	$1,347,500	($490,000)	$1,837,500	($87,500)	$1,925,000
Less: Fixed Cost	$700,000				$550,000
Operating Income	$647,500				$1,375,000

Table (2)

Summary of the selling price variance and volume variances based on contribution is as follows:

Sales	Sales Price Variance	Sales Volume Variance
Quality	($210,000)	$140,000
Heavy duty	($280,000)	($227,500)
Total	($490,000)	($87,500)

Table (3)

2.

To determine

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

Explanation of Solution

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

Particulars	Sales Mix variance	Sales Quantity variance	Sales Volume Variance
Quality	$140,000	$0	$140,000
Heavy duty	($227,500)	$0	($227,500)
	($87,500)	$0	($87,500)

Table (4)

Working note 1: Calculate the Sales Mix variance:

Particulars	Calculations	Result
Quality	$\left(50\%-40\%\right)\times 3,500\times \left(\$1,200-\$800\right)$	$140,000 (F)
Heavy duty	$\left(60\%-50\%\right)\times 3,500\times \left(\$1,600-\$950\right)$	$227,500 (U)

Table (5)

Working Note 2: Calculate the Sales Quantity variances:

As there is no change in the total sales units for both Products, the sales quantity variance is zero.

3.

To determine

Identify whether the price change and increase in advertising have the expected results. Explain.

Explanation of Solution

The total unfavorable variance is $490,000 which is expected due to huge losses reflected in the higher variances in selling price. There was a huge unfavorable volume variance of $87,500, which is due to the changes made in product mix and no adjustment in the quantity of sales. The volume variance consists of mix and quantity variances. There was a good mix variance for the Quality product of $140,000 because of its increase from 40% to 50% of the total sales. In any case, there was an unfavorable mix variance of $227,500 for the Heavy-Duty product due to the decrease in the mix from 60% to 50%.

Unfortunately for Incorporation GG, the Quality product has a lower budgeted contribution margin of $400 $\left(\$1,200-\$800\right)$ comparative with the commitment on the Heavy Duty product, which has a commitment edge of $650$\left(\$1,600-\$950\right)$. So, the firm lost high edge deals and expanded low edge deals. Management should analyze the purpose behind the uncertain outcome. Maybe the advertizing was intended to cause to notice the Quality product, whereas the lowering of prices for the two products had an effect on Quality product, the lower-priced product. Since the Heavy-Duty product is probably going to keep on having higher margins, thetrend in saleswill be a worry for the organization.

4.

To determine

Identify the methods that Incorporation GG adopt to become more competitive in the current and coming year.

Explanation of Solution

The reduction in operating income from $1,375,000 to $647,500 from proceeding the present year is a significant concern. As shown in the issue, the firm is beginning to examine approaches to reduce variable costs for the coming year. A helpful method to begin this planning is to utilize components of target costing and persistent improvement. While not beginning without any preparation, a fundamental target costing idea is to see approaches to redesign the item or manufacturing process to reduce manufacturing costs. This includes to some extent looking at the item includes and changing the highlights offered in the items to all the more likely match customers' desires. For instance, costly features that are not in much demand by customers should to be deleted or redesigned, while features that are quite wanted by customers and are relatively low cost to make ought to be included.

Another methodology is to utilize the productivity analyses acquainted right now to decide financial and operational partial productivity measures for the key manufacturing cost factors and to screen these measures to look for development.

Another methodology an understudy may recommend is to utilize ABC to all the more likely comprehend the drivers of backhanded costs. The ABC analysis would then be able to be utilized with ABM to distinguish non-value-added costs.

Finally, standard costing and the flexible budget would be a way to deal with considering. Standard costing sets standard use and prices for the key manufacturing inputs and decides differences from these information sources. The six variable cost fluctuations are use and cost for materials, utilization, and rate for work, and use and spending changes for variable overhead. An examination of these changes may help distinguish the reason for a portion of the benefits decrease.