1.
Make a segmented income statement. Also, separate the direct and common fixed costs.
1.
Explanation of Solution
Segmented Income Statement:
Variable costing is used in the preparation of a segmented income statement. In this income statement, the variable expenses are recorded separately from the fixed expenses which are further divided into direct fixed expenses and common expenses.
The following table represents the segmented income statement of Company A:
Company A | |||
Segmented Income Statement | |||
For the Previous Year | |||
Blenders ($) |
Coffee Makers ($) |
Total ($) | |
Sales1 | 1,560,000 | 2,175,000 | 3,735,000 |
Less variable cost of goods sold:2 | 1,170,000 | 2,025,000 | 3,195,000 |
Contribution margin | 390,000 | 150,000 | 540,000 |
Less direct fixed expenses: | 184,000 | 142,500 | 326,500 |
Segment margin | 206,000 | 7,500 | 213,500 |
Less common fixed expenses3: | 13,500 | ||
Operating income | 200,000 |
Table (1)
Therefore, the amount of operating income is $200,000.
Working Notes:
1. Calculation of sales for blenders:
Hence, the amount of sales for blenders is $1,560,000.
Calculation of sales for coffee makers:
Hence, the amount of sales for coffee makers is $2,175,000.
2. Calculation of variable cost of goods sold for blenders:
Hence, the amount of variable cost of goods sold for blenders is $1,170,000.
Calculation of variable cost of goods sold for coffee makers:
Hence, the amount of variable cost of goods sold for coffee makers is $2,025,000.
3. Calculation of common fixed expenses:
Hence, the common fixed expense is $13,500.
2.
Describe the impact on profit of Company A if the line of coffee maker is dropped and in if blender line is dropped.
2.
Explanation of Solution
If Company A drops the coffee maker line then the profit will get reduced by $7,500 (segment margin). If Company A drops the blenders line then the profit will get reduced by $206,000. If any of the alternatives is rejected, then the relevant cost of the rejected alternative will not be recorded in the segmented income statement.
3.
Describe the effect on the firm’s profit if the additional 10,000 blenders are produced and sold at $21.50.
3.
Explanation of Solution
The following table represents the segmented income statement of Company A:
Company A | |||
Segmented Income Statement | |||
For the Previous Year | |||
Blenders ($) | Coffee Makers ($) | Total ($) | |
Sales1 | 1,775,000 | 2,175,000 | 3,950,000 |
Less variable cost of goods sold2: | 1,350,000 | 2,025,000 | 3,375,000 |
Contribution margin | 425,000 | 150,000 | 575,000 |
Less direct fixed expenses: | 184,000 | 142,500 | 326,500 |
Segment margin | 241,000 | 7,500 | 248,500 |
Less common fixed expenses3: | 13,500 | ||
Operating income | 235,000 |
Table (2)
The amount of operating income is $235,000. The amount of profit before additional units were produced was $200,000. It can be concluded that if the company produced additional 10,000 units, then the operating income will be increased by $35,000.
Working Notes:
1. Calculation of sales for blenders:
Hence, the amount of sales for blenders is $1,775,000.
Calculation of sales for coffee makers:
Hence, the amount of sales for coffee makers is $2,175,000.
2. Calculation of variable cost of goods sold for blenders:
Hence, the amount of variable cost of goods sold for blenders is $1,350,000.
Calculation of variable cost of goods sold for coffee makers:
Hence, the amount of variable cost of goods sold for coffee makers is $2,025,000.
3. Calculation of common fixed expenses:
Hence, the common fixed expense is $13,500.
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Chapter 8 Solutions
Managerial Accounting: The Cornerstone of Business Decision-Making
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