Managerial Accounting: The Cornerstone of Business Decision-Making
Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
ISBN: 9781337115773
Author: Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher: Cengage Learning
Question
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Chapter 8, Problem 55P

1.

To determine

Make a segmented income statement. Also, separate the direct and common fixed costs.

1.

Expert Solution
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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

($)

Sales11,560,0002,175,0003,735,000
Less variable cost of goods sold:21,170,0002,025,0003,195,000
Contribution margin390,000150,000540,000
Less direct fixed expenses:184,000142,500326,500
Segment margin206,0007,500213,500
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:

Sales=Units sold×Sales price=65,000units×$24=$1,560,000

Hence, the amount of sales for blenders is $1,560,000.

Calculation of sales for coffee makers:

Sales=Units sold×Sales price=75,000units×$29=$2,175,000

Hence, the amount of sales for coffee makers is $2,175,000.

2. Calculation of variable cost of goods sold for blenders:

Variable cost of goods sold=Units sold×Variable expense per unit=65,000units×$18=$1,170,000

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:

Variable cost of goods sold=Units sold×Variable expense per unit=75,000units×$27=$2,025,000

Hence, the amount of variable cost of goods sold for coffee makers is $2,025,000.

3. Calculation of common fixed expenses:

Common fixed expenses=(Total fixed costsDirect fixed expense for blendersDirect fixed expense for coffee makers)=$340,000$184,000$142,500=$13,500

Hence, the common fixed expense is $13,500.

2.

To determine

Describe the impact on profit of Company A if the line of coffee maker is dropped and in if blender line is dropped.

2.

Expert Solution
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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.

To determine

Describe the effect on the firm’s profit if the additional 10,000 blenders are produced and sold at $21.50.

3.

Expert Solution
Check Mark

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 ($)
Sales11,775,0002,175,0003,950,000
Less variable cost of goods sold2:1,350,0002,025,0003,375,000
Contribution margin425,000150,000575,000
Less direct fixed expenses:184,000142,500326,500
Segment margin241,0007,500248,500
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:

Sales=(Units sold×Sales price)+(Additional units×Sales price)=(65,000units×$24)+($10,000units×$21.5)=$1,560,000+$215,000=$1,775,000

Hence, the amount of sales for blenders is $1,775,000.

Calculation of sales for coffee makers:

Sales=Units sold×Sales price=75,000units×$29=$2,175,000

Hence, the amount of sales for coffee makers is $2,175,000.

2. Calculation of variable cost of goods sold for blenders:

Variable cost of goods sold=(Units sold+Additional units)×Variable expense per unit=(65,000units+10,000units)×$18=75,000units×$18=$1,350,000

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:

Variable cost of goods sold=Units sold×Variable expense per unit=75,000units×$27=$2,025,000

Hence, the amount of variable cost of goods sold for coffee makers is $2,025,000.

3. Calculation of common fixed expenses:

Common fixed expenses=(Total fixed costsDirect fixed expense for blendersDirect fixed expense for coffee makers)=$340,000$184,000$142,500=$13,500

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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