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Chapter 21: Q10SE (page 1168)

Analyzing profitability

Camden Company has divided its business into segments based on sales territories: East Coast, Midland, and West Coast. Following are financial data for 2018:

East Coast

Midland

West Coast

Units sold

71

69

53

Sales price per unit

\(10,300

\)13,600

\(12,000

Variable cost per unit

6,283

7,072

7,080

Prepare an income statement for Camden Company for 2018 using the contribution margin format assuming total fixed costs for the company were \)435,000. Include columns for each business segment and a column for the total company.

Short Answer

Expert verified

Answer

The total operating income of the company is $561,399.

Step by step solution

01

Calculation of net sales revenue and variable cost

Particulars

East Coast

Midland

West Coast

Net sales revenue (Units sold x Sales price per unit)

71x$10,300 =$731,300

69x$13,600 =$938,400

53x$12,000 =$636,000

Variable cost (Units sold x Variable cost per unit)

71x$6,283 =$446,093

69x$7,072 =$487,968

53x$7,080

=$375,240

02

Income statement for Camden Company for 2018

Particulars

East Coast

Midland

West Coast

Total company

Net sales revenue

$731,300

$938,400

$636,000

$2,305,700

Less: Variable cost

$446,093

$487,968

$375,240

$1,309,301

Contribution Margin

$285,207

$450,432

$260,760

$996,399

Less: Total fixed cost

$435,000

Operating Income

$561,399

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Most popular questions from this chapter

Computing absorption costing gross profit

Refer to your answers to Short Exercise S21-6. Product X sells for \(175 per unit. Assume no beginning inventories. Calculate the gross profit using absorption costing when Adamson:

  1. Produces and sells 2,000 units.
  2. Produces 2,500 units and sells 2,000 units.
  3. Produces 5,000 units and sells 2,000 units.

S21-6 Direct materials \) 41 per unit Direct labor 57 per unit Variable manufacturing overhead 7 per unit Fixed manufacturing overhead 20,000 per ye

Question: Communication Activity 21-1

In 100 words or fewer, explain the main differences and similarities between variable costing and absorption costing.

Preparing variable and absorption costing income statements Linda鈥檚 Foods produces frozen meals that it sells for \(7 each. The company computes a new monthly fixed manufacturing overhead allocation rate based on the planned number of meals to be produced that month. Assume all costs and production levels are exactly as planned. The following data are from Linda鈥檚 Foods鈥檚 first month in business:

January 2018

Units produced and sold:

Sales 1,000 meals

Production 1,200 meals

Variable manufacturing cost per meal \) 3

Sales commission cost per meal 1

Total fixed manufacturing overhead 660

Total fixed selling and administrative costs 500

Requirements:

  1. Compute the product cost per meal produced under absorption costing and under variable costing.
  2. Prepare income statements for January 2018 using: a. absorption costing. b. variable costing.
  3. Is operating income higher under absorption costing or variable costing in January?

: Before you begin this assignment, review the Tying It All Together feature in the chapter. CF Industries Holdings, Inc. is one of the largest manufacturers and distributors of nitrogen fertilizer and other nitrogen products in the world. The corporation often produces and stores large amounts of inventory during periods of low demand to ensure that there is enough product to meet the demand of peak seasons. Assume that one line of fertilizer (with no beginning Finished Goods Inventory) had the following data during a time period of low demand:

Sales price $ 20.00 per case Variable manufacturing costs 4.00 per case Fixed manufacturing costs 100,000 per quarter Variable selling and administrative costs 2.00 per case Fixed selling and administrative costs 45,000 per quarter Given that the time period has low demand, assume the company produced 1,000,000 cases but only sold 250,000 cases.

Requirement

1. Prepare the income statement for the quarter using variable costing.

2. Prepare the income statement for the quarter using absorption costing.

3. Why, if at all, is there a difference between operating income under the two methods?

Question: The Hurley Hat Company manufactures baseball hats. Hurley鈥檚 primary customers are sporting goods stores that supply uniforms to youth baseball teams. Following is Hurley鈥檚 income statement for 2018:

In 2018, Hurley produced and sold 200,000 baseball hats. Of the Cost of Goods Sold, \(150,000 is fixed; 80% of the Selling and Administrative Expenses are fixed. There were no beginning inventories on January 1, 2018. The company is considering two options to increase sales.

Option 1: The company is operating at 100,000 hats below full production capacity and is considering increasing advertising to increase sales to the production capacity level in 2019. The marketing director predicts that an additional \)100,000 expenditure for advertising would increase sales to 300,000 hats per year.

Option 2: The sales manager has been negotiating with buyers for several national sporting goods retailers and recommends the company expand production capacity to 400,000 hats in order to secure long-term contracts beginning in 2019. The expansion is expected to increase fixed manufacturing costs by \(200,000 per year. Additionally, the retailers are requesting a higher-quality hat, and the changes to the hat materials and manufacturing process would increase variable manufacturing costs by \)1 per hat for the additional 200,000 hats. (The original 200,000 hats manufactured and sold would not be affected by this change.)

Requirements

1. Use the data from the 2018 income statement to prepare an income statement using variable costing. Assume no beginning or ending inventories. Calculate the contribution margin ratio. Round to two decimal places.

2. Prepare an absorption costing income statement assuming the company pursues Option 1 and increases advertising and production and sales increase to 300,000 hats.

3. Refer to the original data. Prepare an absorption costing income statement assuming the company pursues Option 2 and increases capacity and sales and production increases to 400,000 total hats.

4. Which option should the company pursue? Explain your reasoning.
See all solutions

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