Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Problem 6-23B (60 minutes)
1.
a.
Absorption costing unit product cost is:
Direct materials ...........................................
$7.40
Direct labor .................................................
3.00
Variable manufacturing overhead .................
1.70
Fixed manufacturing overhead
($194,400 ÷ 24,000 units) ........................
8.10
Absorption costing unit product cost .............
$20.20
b.
The absorption costing income statement is:
Sales (21,000 units) .................................................
$ 762,300
Cost of goods sold (21,000 units × $20.20 per unit) ...
424,200
Gross margin ...........................................................
338,100
Selling and administrative expenses
($219,000 + 21,000 units × $7.70 per unit) ............
380,700
Net operating income (loss) ......................................
$(42,600)
c.
The reconciliation is as follows:
Variable costing net operating loss ............................
$ (66,900)
Add fixed manufacturing overhead cost deferred in
inventory under absorption costing
(3,000 units × $8.10 per unit) ................................
24,300
Absorption costing net operating income ...................
$(42,600)
Problem 6-23B (continued)
2.
a.
The variable costing income statement is:
Sales (27,000 units × $36.30 per unit) ...........
$980,100
Variable expenses:
Variable cost of goods sold
(27,000 units × $12.10 per unit) ...............
$326,700
Variable selling and administrative expenses
(27,000 units × $7.70 per unit) ................
207,900
534,600
Contribution margin ......................................
445,500
Fixed expense:
Fixed manufacturing overhead.....................
194,400
Fixed selling and administrative expense ......
219,000
413,400
Net operating income ....................................
$ 32,100
b.
The absorption costing income statement would be constructed as
follows:
The absorption costing unit product cost will remain at $20.20, the
same as in part (1).
Sales (27,000 units × $36.30 per unit) ..........................
$980,100
Cost of goods sold (27,000 units × $20.20 per unit) .......
545,400
Gross margin ...............................................................
434,700
Selling and administrative expenses
(27,000 units × $7.70 per unit + $219,000) ................
426,900
Net operating income ...................................................
$ 7,800
c.
The reconciliation is as follows:
Variable costing net operating income ...........................
$32,100
Deduct fixed manufacturing overhead cost released
from inventory under absorption costing (3,000 units
× $8.10 per unit) .......................................................
24,300
Absorption costing net operating income .......................
$ 7,800
Problem 6-24B (60 minutes)
1. The disadvantages or weaknesses of the company’s version of a
segmented income statement are as follows:
a. The company should include a column showing the combined results
2. Corporate advertising expenses may have apparently been allocated on
the basis of sales dollars although a consistent percentage was not
used. The general administrative expenses have apparently been
Problem 6-24B (continued)
Total
Southern
Europe
Middle
Europe
Northern
Europe
Amount
in €s
%
Amount
in €s
%
Amount
in €s
%
Amount
in €s
%
Sales .....................................
1,813,000
100.0
311,000
100.0
804,000
100.0
698,000
100.0
Variable expenses:
Cost of goods sold ...............
649,000
35.8
98,000
31.5
240,000
29.9
311,000
44.6
Shipping expense ................
86,000
4.7
13,000
4.2
34,000
4.2
39,000
5.6
Total variable expenses ...........
735,000
40.5
111,000
35.7
274,000
34.1
350,000
50.2
Contribution margin ................
1,078,000
59.5
200,000
64.3
530,000
65.9
348,000
49.8
Traceable fixed expenses:
Salaries ...............................
212,000
11.7
55,000
17.7
52,000
6.5
105,000
15.0
Insurance ............................
38,200
2.1
8,700
2.8
16,000
2.0
13,500
1.9
Advertising ..........................
588,000
32.4
105,000
33.8
241,000
30.0
242,000
34.7
Depreciation ........................
80,000
4.4
19,000
6.1
32,000
4.0
29,000
4.2
Total traceable fixed
expenses .............................
918,200
50.6
187,700
60.4
341,000
42.5
389,500
55.8
Territorial segment margin ......
159,800
8.9
12,300
3.9
189,000
23.4
(41,500)
(5.9)
Common fixed expenses:
Advertising (general)............
94,000
5.2
General administration .........
60,000
3.3
Total common fixed expense ...
154,000
8.5
Net operating loss ..................
5,800)
0.4)
Note: Columns may not total due to rounding.
Problem 6-24B (continued)
4. The following points should be brought to the attention of management:
a. Sales in Southern Europe are much lower than in the other two
territories. This is not due to lack of salespeople—salaries in Southern
only 49.8%, as compared to 65.9% and 64.3% for the other two
territories.
d. Northern Europe may be overstaffed. Its total salaries are much
company.
Problem 6-25B (75 minutes)
1.
Year 1
Year 2
Year 3
Unit sales ...................................
40,000
32,000
40,000
Sales .........................................
$1,000,000
$ 800,000
$1,000,000
Variable expenses:
Variable cost of goods sold @
$4 per unit ............................
160,000
128,000
160,000
Variable selling and
administrative @ $4 per unit ..
160,000
128,000
160,000
Total variable expenses ...............
320,000
256,000
320,000
Contribution margin ....................
680,000
544,000
680,000
Fixed expenses:
Fixed manufacturing overhead ..
600,000
600,000
600,000
Fixed selling and administrative
70,000
70,000
70,000
Total fixed expenses ...................
670,000
670,000
670,000
Net operating income (loss) ........
$ 10,000
$(126,000)
$ 10,000
Problem 6-25B (continued)
2.
a.
Year 1
Year 2
Year 3
Variable manufacturing cost .............
$ 4.00
$ 4.00
$ 4.00
Fixed manufacturing cost:
$600,000 ÷ 40,000 units ...............
15.00
$600,000 ÷ 50,000 units ...............
12.00
$600,000 ÷ 32,000 units ...............
18.75
Absorption costing unit product cost .
$19.00
$16.00
$22.75
b.
Variable costing net operating
income (loss) ...............................
$10,000
$(126,000)
$ 10,000
Add (deduct) fixed manufacturing
overhead cost deferred in
(released from) inventory from
Year 2 to Year 3 under absorption
costing (18,000 units × $12.00
per unit) ......................................
216,000
(216,000)
Add fixed manufacturing overhead
cost deferred in inventory from
Year 3 to the future under
absorption costing (10,000 units ×
$18.75 per unit) ...........................
187,500
Absorption costing net operating
income (loss) ...............................
$10,000
$ 90,000
$(18,500)
3. Production went up sharply in Year 2 thereby reducing the unit product
cost, as shown in (2a). This reduction in cost, combined with the large
4. The fixed manufacturing overhead cost deferred in inventory from Year
2 was charged against Year 3 operations, as shown in the reconciliation
Problem 6-25B (continued)
5. a. With lean production, production would have been geared to sales in
each year so that little or no inventory of finished goods would have
been built up in either Year 2 or Year 3.
b. If lean production had been in use, the net operating income under
absorption costing would have been the same as under variable
Problem 6-26B (45 minutes)
1. The segmented income statement follows:
Total
Company
Wheat
Cereal
Pancake
Mix
Flour
Sales ................................
$1,170,000
$390,000
$490,000
$290,000
Variable expenses:
Materials, labor & other ...
579,900
191,100
298,900
89,900
Sales commissions ..........
117,000
39,000
49,000
29,000
Total variable expenses ......
696,900
230,100
347,900
118,900
Contribution margin ...........
473,100
159,900
142,100
171,100
Traceable fixed expenses:
Advertising .....................
156,050
73,000
50,000
33,050
Salaries ..........................
98,500
43,300
10,200
45,000
Equipment depreciation* .
58,500
23,400
29,250
5,850
Warehouse rent** ..........
23,400
4,000
7,000
12,400
Total traceable fixed
expenses ........................
336,450
143,700
96,450
96,300
Product line segment
margin ...........................
136,650
$ 16,200
$ 45,650
$ 74,800
Common fixed expenses:
General administration ....
84,000
Net operating income ........
$ 52,650
*
$58,500 × 40%, 50%, and 10% respectively
**
$0.50 per square foot × 8,000 square feet, 14,000 square feet,
and 24,800 square feet respectively
Problem 6-26B (continued)
2. a. No, the wheat cereal should not be eliminated. The wheat cereal product is covering all of its own
costs and is generating a $16,200 segment margin toward covering the company’s common costs
and toward profits. (Note: Problems relating to the elimination of a product line are covered in
more depth in a later chapter.)
b.
Wheat
Cereal
Pancake
Mix
Flour
Contribution margin (a) .................
$159,900
$142,100
$171,100
Sales (b) .......................................
$390,000
$490,000
$290,000
Contribution margin ratio (a) ÷ (b) .
41%
29%
59%
It is probably unwise to focus all available resources on promoting the pancake mix. The company
is already spending nearly as much on the promotion of this product as on the other two products
together. Furthermore, the pancake mix has the lowest contribution margin ratio of the three
products. Therefore, a dollar of sales of the pancake mix generates less profit than a dollar of sales
of either of the two other products. Nevertheless, we cannot say for sure which product should be
emphasized in this situation without more information. The problem states that there is ample
demand for all three products, which suggests that there is no idle capacity. If the equipment is
being fully utilized, increasing the production of any one product would probably require cutting
back production of the other products. In a later chapter we will discuss how to choose the most
profitable product when a production constraint forces such a trade-off among products.
