Costello Industries Inc. manufactures only one product. For the year ended December 31, 2012, the contribution margin increased by $19,800 from the planned level of $888,800. The president of Costello Industries Inc. has expressed some concern about such a small increase and has requested a follow-up report.
The following data have been gathered from the accounting records for the year ended December 31, 2012:
Actual Planned Difference-Increase (Decrease)
Sales $1,771,000 $1,760,000 $11,000
Variable cost of goods sold $677,600 $712,800 ($35,200)
Variable selling and administrative expenses 184,800 158,400 26,400
Total $862,400 $871,200 ($8,800)
Contribution margin $908,600 $888,800 $19,800
Number of units sold 15,400 17,600
Sales price $115.00 $100.00
Variable cost of goods sold $44.00 $40.50
Variable selling and administrative expenses 12.00 9.00
2. At a meeting of the board of directors on January 30, 2013, the president, after reviewing the contribution margin analysis report, made the following comment:
It looks as if the price increase of $15 had the effect of decreasing sales volume. However, this was a favorable tradeoff. The variable cost of goods sold was less than planned. Apparently, we are efficiently managing our variable cost of goods sold. However, the variable selling and administrative expenses appear out of control. Let’s look into these expenses and get them under control! Also, let’s consider increasing the sales price to $130 and continue this favorable tradeoff between higher price and lower volume.
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