Question

Contribution Margin Analysis—Sales

Select Audio Inc. sells electronic equipment. Management decided early in the year to reduce the price of the speakers in order to increase sales volume. As a result, for the year ended December 31, the sales increased by $19,100 from the planned level of $1,025,100. The following information is available from the accounting records for the year ended December 31.

	Actual		Planned		Increase or (Decrease)
Sales	$1,044,200		$1,025,100		$19,100
Number of units sold	22,700		20,100		2,600
Sales price	$46		$51		$(5)
Variable cost per unit	$8		$8		$0

a. Prepare an analysis of the sales quantity and unit price factors. Use a minus sign for any negative amounts.

Select Audio Inc.
Contribution Margin Analysis—Sales
For the Year Ended December 31
Effect of changes in sales:
Sales quantity factor	$
Unit price factor
Total effect of changes in sales		$

b. Did the price decrease generate sufficient volume to result in a net increase in contribution margin if the actual variable cost per unit was $8, as planned?

Answer 1

• All working forms part of the answer.
• Working:

Sale Quantity Factor =(Actual Units - Planned units) x Planned sales price
= (22,700 – 20,100) x $51
= $ 132,600

Unit Price Factor = ( Actual Sales price – Planned Sales Price) x Actual units sold
= ($ 46 – $ 51) x 22,700
= $ (113,500)

• Requirement ‘a’

Select Audio Inc.
Contribution Margin Analysis—Sales
For the Year Ended December 31
Effect of changes in sales:
Sales quantity factor	$                   132,600.00
Unit price factor	$                  (113,500.00)
Total effect of changes in sales		$           19,100.00

• Requirement ‘b’

----Working----

Working		Actual	Planned
A	Sales	$                       1,044,200.00	$        1,025,100.00
B	Variable cost	$                           181,600.00	$             160,800.00
C=A-B	Contribution margin	$                           862,600.00	$             864,300.00

Answer: Actual Contribution margin ($862,600) is LOWER than Planned Contribution margin ($864,300), hence, Price decrease has not resulted in a net increase in Contribution margin.