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Problem 5-25 (continued)
2.
a.
Year 1
Year 2
Year 3
Variable manufacturing cost .............
$ 4
$ 4
$ 4
Fixed manufacturing cost:
$600,000 ÷ 50,000 units ...............
12
$600,000 ÷ 60,000 units ...............
10
$600,000 ÷ 40,000 units ...............
15
Absorption costing unit product cost .
$16
$14
$19
b.
Variable costing net operating
income (loss) ...............................
$30,000
$(110,000)
$ 30,000
Add (deduct) fixed manufacturing
overhead cost deferred in
(released from) inventory from
Year 2 to Year 3 under absorption
costing (20,000 units × $10 per
unit) ............................................
200,000
(200,000)
Add fixed manufacturing overhead
cost deferred in inventory from
Year 3 to the future under
absorption costing (10,000 units ×
$15 per unit) ................................
150,000
Absorption costing net operating
income (loss) ...............................
$30,000
$ 90,000
$(20,000)
4. The fixed manufacturing overhead cost deferred in inventory from Year
2 was charged against Year 3 operations, as shown in the reconciliation
in (2b). This added charge against Year 3 operations was offset
somewhat by the fact that part of Year 3’s fixed manufacturing overhead
costs was deferred in inventory to future years [again see (2b)]. Overall,
Problem 5-26 (45 minutes)
1. The segmented income statement follows:
Total
Company
Wheat
Cereal
Pancake
Mix
Flour
Sales ................................
$600,000
$200,000
$300,000
$100,000
Variable expenses:
Materials, labor & other ...
204,000
60,000
126,000
18,000
Sales commissions ..........
60,000
20,000
30,000
10,000
Total variable expenses ......
264,000
80,000
156,000
28,000
Contribution margin ...........
336,000
120,000
144,000
72,000
Traceable fixed expenses:
Advertising .....................
123,000
48,000
60,000
15,000
Salaries ..........................
66,000
34,000
21,000
11,000
Equipment depreciation* .
30,000
12,000
15,000
3,000
Warehouse rent** ..........
12,000
4,000
7,000
1,000
Total traceable fixed
expenses ........................
231,000
98,000
103,000
30,000
Product line segment
margin ...........................
105,000
$ 22,000
$ 41,000
$ 42,000
Common fixed expenses:
General administration ....
90,000
Net operating income ........
$ 15,000
*
$30,000 × 40%, 50%, and 10% respectively
**
$0.50 per square foot × 8,000 square feet, 14,000 square feet, and
2,000 square feet respectively
