ADM 2302 Midterm: Sensitivity Analysis - Cheat Sheet (Useful to add on to cheat sheet, Midterm+Final)
Document Summary
Get access
Related Documents
Related Questions
I need a step by step solution for the following.
A manufacturing plant has a potential production capacity of 1,000 units per month (capacity can be increased by 10 percent if subcontractors are employed). The plant is normally operated at about 80 percent of capacity. Operating the plant above this level significantly increases variable costs per unit because of the need to pay the skilled workers higher overtime wage rates. For output levels up to 80 percent of capacity, the variable cost per unit is $100. Above 80 percent and up to 90 percent, variable costs on this additional output increase by 10 percent. When the output is above 90 percent and up to 100 percent of capacity, the additional units cost an additional 25 percent over the unit variable costs for outputs up to 80 percent of capacity. For production above 100 percent and up to 110 percent of capacity, extensive subcontracting work is used and the unit variable costs of these additional units are 50 percent above those at output levels up to 80 percent of capacity. At 80 percent of capacity, the plant's fixed costs per unit are $50. Total fixed costs are not expected to change within the production range under consideration. Based on the preceding information, complete the following table.
|
Q |
TTC |
TFC |
TVC |
ATC |
AFC |
AVC |
MC |
|
500 |
Ā | Ā | Ā | Ā | Ā | Ā | Ā |
|
600 |
Ā | Ā | Ā | Ā | Ā | Ā | Ā |
|
700 |
Ā | Ā | Ā | Ā | Ā | Ā | Ā |
|
800 |
Ā | Ā | Ā | Ā | Ā | Ā | Ā |
|
900 |
Ā | Ā | Ā | Ā | Ā | Ā | Ā |
|
1000 |
Ā | Ā | Ā | Ā | Ā | Ā | Ā |
|
1100 |
Ā | Ā | Ā | Ā | Ā | Ā | Ā |
Mathews Company manufactures only one product. For the year ended December 31, the The excess of sales over variable costs.contribution margin increased by $20,280 from the planned level of $681,720. The president of Mathews Company has expressed some concern about this increase and has requested a follow-up report.
The following data have been gathered from the accounting records for the year ended December 31:
| Actual | Planned | DifferenceĆ¢ĀĀIncrease (Decrease) | ||||
| Sales | $1,339,000 | $1,318,980 | $20,020 | |||
| Variable costs: | ||||||
| Variable cost of goods sold | $507,000 | $533,520 | $(26,520) | |||
| Variable selling and administrative expenses | 130,000 | 103,740 | 26,260 | |||
| Total variable costs | $637,000 | $637,260 | $(260) | |||
| Contribution margin | $702,000 | $681,720 | $20,280 | |||
| Number of units sold | 13,000 | 14,820 | ||||
| Per unit: | ||||||
| Sales price | $103 | $89 | ||||
| Variable cost of goods sold | 39 | 36 | ||||
| Variable selling and administrative expenses | 10 | 7 | ||||
Required:
1. Prepare a contribution margin analysis report for the year ended December 31.
| Mathews Company | ||
| Contribution Margin Analysis | ||
| For the Year Ended December 31 | ||
| Planned contribution margin | $ | |
| Effect of change in sales: | ||
| Sales quantity factor | $ | |
| Unit price factor | ||
| Total effect of change in sales | ||
| Effect of changes in variable cost of goods sold: | ||
| Variable cost quantity factor | $ | |
| Unit cost factor | ||
| Total effect of changes in variable cost of goods sold | ||
| Effect of changes in variable selling and administrative expenses: | ||
| Variable cost quantity factor | $ | |
| Unit cost factor | ||
| Total effect of changes in variable selling and administrative expenses | ||
| Actual contribution margin | $ | |
2. At a meeting of the board of directors on January 30, the president, after reviewing the contribution margin analysis report, made the following comment:
It looks as if the price increase of $14 was a favorable tradeoff for decreased sales volume, yet variable cost of goods sold was less than planned and variable selling and administrative expenses were out of control and needed to be investigated. He went on to say that since the favorable tradeoff between higher price and lower sales volume was so successful, the company should consider increasing the sales price to $130.
Do you agree or disagree with the president's proposal and which reason would best explain your decision about the data?
a) Disagree with the president because the majority of the decrease in the variable cost of goods sold was due to the variable cost quantity factor and the increased variable selling and administrative expenses are probably a result additional selling efforts needed to be competitive at higher prices.
b) Agree with the president because the unit cost factor for the variable selling and administrative cost is greater than the unit cost factor for the variable cost of goods sold, making an investigation necessary.
c) Agree with the president because the total effect of change in sales is greater than the total effect of changes in variable cost of goods sold, making an additional price raise attractive for more profits.
d) Disagree with the president because the contribution margin as a percentage of sales is greater for the planned sales level than the actual sales level, making his concern about variable selling and administrative expenses unwarranted.
e) Agree with the president because the majority of the decrease in the variable cost of goods sold was due to the sales price factor, as well as an increase in the variable selling and administrative expenses as a percentage of sales, making an additional price raise attractive for more profits.
