Concept explainers
Segment variable costing income statement and effect on income of change in operations
Valdespin Company manufactures three sizes of camping tents—small (S), medium (M), and large (L). The income statement has consistently indicated a net loss for the M size, and management is considering three proposals: (1) continue Size M, (2) discontinue Size M and reduce total output accordingly, or (3) discontinue Size M and conduct an advertising campaign to expand the sales of Size S so that the entire plant capacity can continue to be used.
If Proposal 2 is selected and Size M is discontinued and production curtailed, the annual fixed production costs and fixed operating expenses could be reduced by $46,080 and 532,240. respectively. If Proposal 3 is selected, it is anticipated that an additional annual expenditure of $34,560 for the rental of additional warehouse space would yield an additional 130% in Size S sales volume. It is also assumed that the increased production of Size S would utilize the plant facilities released by the discontinuance of Size M.
The sales and costs have been relatively stable over the past few years, and they are expected to remain so for the foreseeable future. The income statement for the past year ended June 30, 20Y9, is as follows:
Instructions
- 1. Prepare an income statement for the past year in the variable costing: format. Use the following headings:
Data for each style should be reported through contribution margin. The fixed costs should be deducted from the total contribution margin, as reported in the “Total” column, to determine income from operations.
- 2. Based on the income statement prepared in (1) and the other data presented, determine the amount by which total annual income from operations would be reduced below its present level if Proposal 2 is accepted.
- 3. Prepare an income statement in the variable costing format, indicating the projected annual income from operations if Proposal 3 is accepted. Use the following headings:
Data for each style should be reported through contribution margin. The fixed costs should be deducted from the total contribution margin as reported in the “Total” column. For purposes of this problem, the expenditure of $34,560 for the rental of additional warehouse space can be added to the fixed operating expenses.
- 4. By how much would total annual income increase above its present level if Proposal 3 is accepted? Explain.
Trending nowThis is a popular solution!
Chapter 20 Solutions
CengageNOWv2, 2 terms Printed Access Card for Warren/Reeve/Duchac’s Financial & Managerial Accounting, 14th
- Explain the terms break-even point and margin of safety as used in cost-volume-profit (CVP) analysis in short term decision marking. b) Kack Ltd is a company which uses cost-volume-profit analysis for planning and control decisions. You have been given the following information for the just ended operational period: Total revenue GH¢3,600,000 The annual total cost GH¢3,510,000 Variable cost GH¢2,700,000 Required: As the Management Accountant, calculate the following for the use of management in decision making for the forthcoming period: i) Variable cost/sales ratio. (1 mark) ii) Contribution/sales (C/S) ratio. iii) Break-even sales (in value). ( iv) Margin of safety (in value). (1 mark) v) Margin of safety (in percentage). vi) The sales value which would yield a profit of GH¢270,000 assuming the C/S ratio and fixed costs remain unchanged. vii)The sales value which would yield a profit of 15% of that sales assuming the C/S ratio and the fixed costs remain unchanged. viii)…arrow_forwardChange in Sales Mix and Contribution Margin Head Pops Inc. manufactures two models of solar-powered, noise-canceling headphones: Sun Sound and Ear Bling models. The company is operating at less than full capacity. Market research indicates that 32,100 additional Sun Sound and 35,600 additional Ear Bling headphones could be sold. The operating income by unit of product is as follows: Sales price Variable cost of goods sold Manufacturing margin Variable selling and administrative expenses Contribution margin Fixed manufacturing costs Operating income Sun Sound Ear Bling Headphones Headphones $30.80 $48.00 (17.20) (26.90) $13.60 $21.10 (6.20) (9.60) $7.40 $11.50 (2.80) (4.30) $4.60 $7.20 Prepare an analysis indicating the increase or decrease in total profitability if 32,100 additional Sun Sound and 35,600 additional Ear Bling headphones are produced and sold, assuming that there is sufficient capacity for the additional production. Round your per unit answers to two decimal place. Head…arrow_forwardAssume that a company uses the absorption costing approach to cost-plus pricing. It is considering the introduction of a new product. To determine a selling price, the company has gathered the following information: Number of units to be produced and sold each year Unit product cost Estimated annual selling and administrative expenses Estimated investment required by the company Desired return on investment (ROI) What is the markup percentage on absorption cost required to achieve the desired ROI? 15,000 30 $ $81,900 $780,000 12%arrow_forward
- Preparing variable and absorption costing income statements This problem continues the Piedmont Computer Problem situation from Chapter 20. Piedmont Computer Company manufactures personal computers and tablets. Based on the latest information from the cost accountant, using the current sales mix, the weighted-average sales price per unit is $750 and the weighed-average variable cost per unit is $450. The company does not expect the sales mix to vary for the next year. Assume the beginning balance in Finished Goods Inventory is $0. Additional data for the first month of 2020: Requirements Compute the product cost per unit produced under absorption costing and under variable costing. Prepare income statements for January 2020 using: absorption costing. variable costing. 3. Is operating income higher under absorption costing or variable costing in January? What causes the difference?arrow_forwardAssume that a company uses the absorption costing approach to cost-plus pricing. It is considering the introduction of a new product. To determine a selling price, the company has gathered the following information: Number of units to be produced and sold each year Unit product cost Estimated annual selling and administrative expenses Estimated investment required by the company Desired return on investment (ROI) 15,000 $ 33.00 $ 63,900 $780,000 12% The selling price that the company would establish using a markup percentage on absorption cost is closest to:arrow_forwardContinue/Discontinue For the past year, WoolCorp has experimented with its third product, extra-thick rug yarn. The company wishes to consider whether to continue or discontinue manufacturing and selling this product. You decide to prepare a differential analysis of the income related to all three products. To begin your analysis, you review the following condensed income statement. Then scroll down to complete the differential analysis. Sales Costs of goods sold: Variable costs Fixed costs Total cost of goods sold Gross profit Operating expenses: Variable expenses Fixed expenses Total operating expenses Operating income (loss) Revenues Costs: Variable Fixed Profit (loss) $ 197,000 90,260 -130,980 X WoolCorp Condensed Income Statement For the Year Ended December 31, 20Y8 Raw Wool $210,000 Wool Yarn $155,000 -24,240 X $(48,000) (32,000) $(80,000) $130,000 $(5,000) (89,000) $(94,000) $36,000 Complete the following table using the data in the preceding income statement to compare the…arrow_forward
- Kenmore Company manufactures two products. Both products have the same sales price, and the volume of sales is equivalent. However, due to the difference in production processes, Product A has higher variable costs and Product B has higher fixed costs. Management is considering dropping Product B because that product line has an operating loss. Kenmore Company Income Statement Month Ended June 30, 2018 Total Product A Product B Net Sales Revenue $150,000 $75,000 $75,000 Variable Costs 128,750 64,500 64,250 Contribution Margin 21,250 10,500 10,750 Fixed Costs 36,000 3,600 32,400 Operating Income/(Loss) $(14,750) $6,900 $(21,650) If fixed costs cannot be avoided, should Kenmore drop Product B? Why or why not? 10. If 50% of Product B's fixed costs are avoidable, should Kenmore drop Product B? Why or why not?arrow_forwardAnalyzing Income under Absorption and Variable Costing Variable manufacturing costs are $110 per unit, and fixed manufacturing costs are $112,000. Sales are estimated to be 4,200 units. If an amount is zero, enter "0". Do not round interim calculations. Round final answer to nearest whole dollar. a. How much would absorption costing income from operations differ between a plan to produce 4,200 units and a plan to produce 5,600 units? b. How much would variable costing income from operations differ between the two production plans?arrow_forwardChange in Contribution Margin Head Pops Inc. manufactures two models of solar-powered, noise-canceling headphones: Sun Sound and Ear Bling models. The company is operating at less than full capacity. Market research indicates that 29,400 additional Sun Sound and 32,300 additional Ear Bling headphones could be sold. The operating income by unit of product is as follows: Sales price Variable cost of goods sold Manufacturing margin Variable selling and administrative expenses Contribution margin Fixed manufacturing costs Operating income Head Pops Inc. Analysis Line Item Description Unit volume increase x Contribution margin per unit Increase in profitability Sun Sound Ear Bling Headphones Headphones $29.80 $46.50 (16.70) (26.00) $13.10 $20.50 (6.00) $7.10 (2.70) $4.40 Prepare an analysis indicating the increase or decrease in total profitability if 29,400 additional Sun Sound and 32,300 additional Ear Bling headphones are produced and sold, assuming that there is sufficient capacity for…arrow_forward
- Make-or-Buy Decision Matchless Technologies Company has been purchasing carrying cases for its portable tablets at a delivered cost of $58 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 42% of direct labor cost. The fully absorbed unit costs to produce comparable carrying cases are expected to be as follows: Direct materials $24.00 Direct labor 22.00 Factory overhead (42% of direct labor) 9.24 Total cost per unit $55.24 If Matchless Technologies Company manufactures the carrying cases, fixed factory overhead costs will not increase and variable factory overhead costs associated with the cases are expected to be 13% of the direct labor costs. a. Prepare a differential analysis report for the make-or-buy decision. Enter your final answer as a positive amount if it represents a net cost savings; enter a negative amount if it represents an increase in cost. MATCHLESS TECHNOLOGIES COMPANY Manufacture Carrying…arrow_forwardAssume that a company uses the absorption costing approach to cost-plus pricing. It is considering the introduction of a new product. To determine a selling price, the company has gathered the following information: Number of units to be produced and sold each year 15,000 Unit product cost $ 30 Estimated annual selling and administrative expenses $ 68,400 Estimated investment required by the company $ 780,000 Desired return on investment (ROI) 12 % What is the markup percentage on absorption cost required to achieve the desired ROI? Multiple Choice 41% 46% 36% 31%arrow_forwardValue- and Nonvalue-Added Costs Waterfun Technology produces engines for recreational boats. Because of competitive pressures, the company was makong an effort to reduce costs. A part of this effort, management implemented an activity-based management system and began focusing its attention an procetses and activties. Receiving was among the processes (activities) that were carefully studied. The study revealed that the number of receiving orders was a good dnver fur receiving costs. During the last year, the company incurred fixed receiving costs of $630,000 (salaries of 10 empleyees). These fxed costa provide a capacity of processing 72,000 receiving orders (7,200 per employee at practical capacity). Management decided that the efficient level for receiving should use 36,000 receiving orders. Requiredi 1. Explain why receiving would be viewed as a value-added activity. Which of these are possible reasons that explain why the demand for receiving is more than the efficient level of…arrow_forward
- Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubFinancial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning