Knitline Inc. produces high-end sweaters and jackets in a single factory. The following information was provided for the coming year. Sweaters Jackets Sales $210,000 $450,000 Variable cost of goods sold 145,000 196,000 Direct fixed overhead 25,000 47,000 A sales commission of 5% of sales is paid for each of the two product lines. Direct fixed selling and administrative expense was estimated to be $20,000 for the sweater line and $50,000 for the jacket line. Common fixed overhead for the factory was estimated to be $45,000. Common selling and administrative expense was estimated to be $15,000. Required: Prepare a segmented income statement for Knitline for the coming year, using variable costing. Enter all amounts as positive numbers. Knitline Inc. Segmented Income Statement For the Coming Year Sweaters Jackets Total $ $ $ Less variable expenses: Contribution margin $ $ $ Less direct fixed expenses: Segment margin $ $ $ Less common fixed expenses: $ 2. CONCEPTUAL CONNECTION Suppose that next year, all revenues and costs are expected to remain the same except for direct fixed overhead expense, which will go up by $10,000 for one of the product lines due to costs related to new equipment. Does it matter which line (sweaters or jackets) requires the new equipment? Why?
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Knitline Inc. produces high-end sweaters and jackets in a single factory. The following information was provided for the coming year.
| Sweaters | Jackets | |
| Sales | $210,000 | $450,000 |
| Variable cost of goods sold | 145,000 | 196,000 |
| Direct fixed overhead | 25,000 | 47,000 |
A sales commission of 5% of sales is paid for each of the two product lines. Direct fixed selling and administrative expense was estimated to be $20,000 for the sweater line and $50,000 for the jacket line.
Common fixed overhead for the factory was estimated to be $45,000. Common selling and administrative expense was estimated to be $15,000.
Required:Prepare a segmented income statement for Knitline for the coming year, using variable costing. Enter all amounts as positive numbers.
| Knitline Inc. | ||||
| Segmented Income Statement | ||||
| For the Coming Year | ||||
| Sweaters | Jackets | Total | ||
| $ | $ | $ | ||
| Less variable expenses: | ||||
| Contribution margin | $ | $ | $ | |
| Less direct fixed expenses: | ||||
| Segment margin | $ | $ | $ | |
| Less common fixed expenses: | ||||
| $ |
2. CONCEPTUAL CONNECTION Suppose that next year, all revenues and costs are expected to remain the same except for direct fixed overhead expense, which will go up by $10,000 for one of the product lines due to costs related to new equipment. Does it matter which line (sweaters or jackets) requires the new equipment? Why?
If the new equipment is needed in the product line, the increase will cause that segment margin to become a loss and management will need to consider whether the line should be dropped.
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