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Exercise 5-8 (10 minutes)
The completed segmented income statement should appear as follows:
Divisions
Total Company
East
West
Amount
%
Amount
%
Amount
%
Sales ...............................................
$600,000
100.0
$400,000
100.0
$200,000
100.0
Variable expenses ............................
300,000
50.0
250,000
62.5
50,000
25.0
Contribution margin .........................
300,000
50.0
150,000
37.5
150,000
75.0
Traceable fixed expenses ..................
190,000
31.7
80,000
20.0
110,000
55.0
Territorial segment margin ...............
110,000
18.3
$ 70,000
17.5
$40,000
20.0
Common fixed expenses ..................
60,000
10.0
Net operating income .......................
$ 50,000
8.3
Exercise 5-10 (20 minutes)
1. Under absorption costing, all manufacturing costs (variable and fixed)
are included in product costs.
Direct materials ..................................
$ 60
Direct labor ........................................
30
Variable manufacturing overhead ........
10
Fixed manufacturing overhead
($300,000 ÷ 10,000 units) ...............
30
Unit product cost ................................
$130
2. The absorption costing income statement appears below:
Sales (9,000 units × $200 per unit) ...............................
$1,800,000
Cost of goods sold (9,000 units × $130 per unit) ............
1,170,000
Gross margin ................................................................
630,000
Selling and administrative expenses
(9,000 units × $20 per unit) + $450,000 .....................
630,000
Net operating income ...................................................
$ 0
Note: The company apparently has exactly zero net operating income
even though its sales are below the break-even point computed in
Exercise 5-9. This occurs because $30,000 of fixed manufacturing
overhead has been deferred in inventory and does not appear on the
income statement prepared using absorption costing.
