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 $23,500 from the planned level of $1,228,500. The following information is available from the accounting records for the year ended December 31.

	Actual		Planned		Increase or (Decrease)
Sales	$1,252,000		$1,228,500		$23,500
Number of units sold	31,300		27,300		4,000
Sales price	$40		$45		$(5)
Variable cost per unit	$7		$7		$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 $7, as planned?

Answer 1

Solution :-

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	= [ 31,300 - 27,300 ] * $45 = $180,000
Unit price factor	= [ $45 - $40 ] * 31,300 = $156,500
Total effect of changes in sales		=  $180,000 - $156,500 = $23,500

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 $7, as planned?

	Actual	Planned	Change
Sales	$1,252,000	$1,228,500	$23,500
Variable cost	= 31,300 * $7 = $219,100	= 27,300 * $7 = $191,100	= $219,100 -  $191,100 = $28,000
Contribution margin	= $1,252,000 - $219,100 = $1,032,900	= $1,228,500 - $191,100 = $1,037,400	= $23,500 - $28,000 = - $4,500

• No, in light of the fact that , it will diminish the contribution margin by $4,500