Case Study: Contribution Margin and Variance Analysis
Case Study:
Contribution Margin and Variance Analysis
By: Sachin Malhotra
Student ID:xxxxxxxxx
Presented To: Prof. G. Dunning
Course: 04-70-256
Section 2
Date: November 28, 2008
Explanation of Profit Decline
The decline in profits was due to a combination of various market, as well as, production factors.
Firstly, the decreased market share was a major cause of the decline in the profits. This was quite surprising for a company that is operating in a growing market. The total market for woodstoves grew by 33% during the year and, had the company, maintained its market share, it should have achieved a $505,000 increase in its contribution margin over the budget. Instead, FFL's market share decreased by 1% which reduced the previously mentioned expected increase in contribution margin by $202,000. The net result was that the increase in market volume and the decreased market share should have still resulted in FFL increasing its contribution margin by $303,000 over the budget.
Secondly, the change in mix of sales was another cause leading to the decreased profits. FFL sold more of the Basic and less of the Deluxe models. Since the Deluxe model has a much higher contribution margin per unit ($210 versus $80), the change in mix of sales had a negative impact on profits, i.e., decrease of $234,000. This negative impact, however, is not enough to offset the positive impact of the sales quantity increase (i.e., $234,000 decrease versus $303,000 increase).
Thirdly, the change in Price also affected the profits. The price of the basic model increased by 8.3% and the sales volume also increased. The price increase alone would have a favorable impact of $180,000 on revenue. The problem was with the Deluxe model. The price was decreased by 12.5% resulting in a revenue decrease of $480,000. Also, the volume decreased despite the drop in selling price. The net effect of selling more Basic (at lower unit CM) and selling less Deluxe (at a higher unit CM) was a
Contribution Margin and Variance Analysis
By: Sachin Malhotra
Student ID:xxxxxxxxx
Presented To: Prof. G. Dunning
Course: 04-70-256
Section 2
Date: November 28, 2008
Explanation of Profit Decline
The decline in profits was due to a combination of various market, as well as, production factors.
Firstly, the decreased market share was a major cause of the decline in the profits. This was quite surprising for a company that is operating in a growing market. The total market for woodstoves grew by 33% during the year and, had the company, maintained its market share, it should have achieved a $505,000 increase in its contribution margin over the budget. Instead, FFL's market share decreased by 1% which reduced the previously mentioned expected increase in contribution margin by $202,000. The net result was that the increase in market volume and the decreased market share should have still resulted in FFL increasing its contribution margin by $303,000 over the budget.
Secondly, the change in mix of sales was another cause leading to the decreased profits. FFL sold more of the Basic and less of the Deluxe models. Since the Deluxe model has a much higher contribution margin per unit ($210 versus $80), the change in mix of sales had a negative impact on profits, i.e., decrease of $234,000. This negative impact, however, is not enough to offset the positive impact of the sales quantity increase (i.e., $234,000 decrease versus $303,000 increase).
Thirdly, the change in Price also affected the profits. The price of the basic model increased by 8.3% and the sales volume also increased. The price increase alone would have a favorable impact of $180,000 on revenue. The problem was with the Deluxe model. The price was decreased by 12.5% resulting in a revenue decrease of $480,000. Also, the volume decreased despite the drop in selling price. The net effect of selling more Basic (at lower unit CM) and selling less Deluxe (at a higher unit CM) was a