Green Grow Inc. manufacturers riding lawn mowers that it sells to the large discount stores such as Wal-Mart, Lowes, and Home Depot. The mowers are marketed as a "value" product, with good quality at a very good price. The company's two products are the Quality mower, which last year it sold for $1,200 (the discounters retailed it for $1,500), and the Heavy Duty model which Green Grow Inc. sold for $1,600 (and was retailed for $2,200). At the end of last year, the company has come under increased price competition from other manufacturers. The company believes it must reduce its price by 10 percent in the current year on both products to keep its current market share with sales of 3,500 units. The unit variable costs for the Quality product are $800 and $950 for the Heavy Duty product. Management does not believe it can reduce these variable costs for the coming year but will begin to study ways to do so for future years. In the meantime, the company management believes it can maintain its total market share by increasing its advertising expenses by $150,000 and cutting the price on both models by 10 percent. Fixed costs were $550,000 last year (including advertising) and are not expected to change, with the exception of the increase in advertising. Last year the sales mix was one-third for Quality and two-thirds for Heavy Duty, respectively. In the current year, the sales mix was 40 percent for Quality and 60 percent for Heavy Duty, respectively.
1. Calculate a comparative contribution income statement for Green Grow Inc. for the current year that shows the volume and selling price variances for each product based on contribution margin.
2. Determine the sales mix variance and the sales quantity variance for each product, based on contribution margin.
3. Did the price change and increase in advertising have the expected results? Why or why not?
4. What methods should Green Grow Inc. adopt to become more competitive in the current and coming year?
This question was answered on: Jul 11, 2017
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