Gross Profit Analysis Based on the Previous Year’s Figures:
As the basis for illustrating the gross profit analysis using the previous year’s figures, the following gross profit section of a company’s operating statements for 19A and 19B are presented.
19A 
19B 
Changes 

Sales (net) Cost of goods soldGross profit 
$120,000 
$140,000 
+$20,000 
In comparison with 19A, sales in 19B increased $20,000 and costs increased $10,000, resulting in increase in gross profit of $10,000.
Additional data taken from various records indicate that the sales and the cost of goods sold figure can be broken down as follows:
19A Sales 
19A Cost of goods sold 

Product  Quantity  Unit Price  Total  Unit Cost  Total 
X  8,000 Units  $5.00  $40,000  $4.000  $32,000 
Y  7,000 Units  $4.00  $28,000  $3.500  $24,500 
Z  20,000 Units  $2.60  $52,000  $2.175  $43,500 
———  ———  
$1,20,000  $1,00,000  
=======  =======  
19B Sales 
19B Cost of goods sold 

Product  Quantity  Unit Price  Total  Unit Cost  Total 
X  10,000 Units  $6.60  $66,000  $4.00  $40,000 
Y  4,000 Units  $3.50  $14,000  3.50  $14,000 
Z  20,000 Units  $3.00  $60,000  2.80  $56,000 
——–  ——  
140,000  110,000  
======  ===== 
In analyzing the gross profit of the company, the sales and cost of 19A are accepted as the basis (or standard) for all comparisons. A sales price variance and a sales volume variance are computed first., followed by the computation of a cost price variance and a cost volume variance. The sales volume variance and cost volume variance are analyzed further as a third step, which result in the computation of a sales mix variance and a final sales volume variance.
Calculation of sales price and sales volume variance:
The sales price and sales mix variances from the above data are calculated as follows:
Actual 19B sales  $140,000  
Actual 19B sales at 19A price:  
X: 10,000 units @ $5.00  $50,000  
Y: 4,000 units @ $4.00  $16,000  
Z: 20,000 units @ $2.60  $52,000  
——  $118,000  
——  
Favorable sales price variance  $22,000  
=======  
Actual 19B sales at 19A price  $118,000  
Total 19A sales (used as standard)  $120,000  
——  
Unfavorable sales volume variance  $2,000  
====== 
Calculation of Cost Price and Cost Volume Variance:
The cost price and and cost volume variances are calculated as follows.
Actual 19B cost of goods sold  $110,000  
Actual 19B sales at 19A cost:  
X: 10,000 units @ $4.000  $40,000  
Y: 4,000 units @ $3.500  $14,000  
Z: 20,000 units @ $2.175  $43,500  
———  $97,500  
———  
Unfavorable cost price variance  $12,500  
========  
Actual 19B sales at 19A cost  $97,500  
Cost of goods sold in 19Aused as standard  $100,000  
———  
Favorable cost volume variance  $2,500  
======== 
The result of the preceding computations might explain the reason for the $10,000 increase in gross profit.
Favorable sales price variance  $22,000  
Favorable volume variance (net) consisting of:  
Favorable cost volume variance  $2,500  
Less unfavorable sales volume variance  $2,000  
——–  
Net favorable volume variance  $500  
——–  
$22,500  
Less unfavorable cost price variance  $12,500  
——  
Increase in gross profit  10,000  
===== 
Calculation of the sales mix and final sales volume variance:
The net $500 favorable volume variance is a composite of the sales volume and cost volume variance. It should be further analyzed to determine the more significant sales mix and final sales volume variances. To accomplish this analysis, one additional figure must be determined―the average gross profit realized on the units sold in the base (or standard) year. The computations is:
Total gross profit ÷ Total number of units sold
= $20,000 ÷ 35,000
= $0.5714
The $0.5714 average gross profit per unit sold in 19A is multiplied by the total number of units sold in 19B (34,000 units). The resulting $19,427 is the total gross profit that would have been achieved in 19B if all units had been sold at 19A’s average gross profit per unit.
The sales mix and final sales volume variance can now be calculated:
Actual 19B sales at 19A sales price  $118,000  
Actual 19B sales at 19A cost  $ 97,500  
————  
Difference  $20,500  
19B sales at 19A average gross profit  $19,427  
———  
Favorable sales mix variance  $ 1,073  
======  
19B sales at 19A average gross profit  $19,427  
Total 19A sales (used as standard)  $120,000  
Cost of goods sold in 19A (used as standard)  100,000  
———  20,000  
———  
Unfavorable final sales volume variance  $573  
====== 
Recapitulations of Variances:
The variances identified in the preceding calculations are summarized below:
Gains 
Losses 

Gain due to increased sales price  $22,000  
Loss due to increased cost  $12,500  
Gain due to shift in sales mix  $1073  
Loss due to decrease in units sold 
$573  
———  ———  
Total  $23073  $13073 
Less  $13073  
———  
Net increase in gross profit 
$10,000  
======= 
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Great article. Any insight on how these gross profit variances could be restated in terms of impact to gross profit %’s?