Chapter 18, Problem 62P

To determine

Draft a contribution income statement for CWI.

Explanation of Solution

Prepare a contribution income statement for CWI.

Particulars	Total ($)	Not allocated ($)	Boston ($)	Hartford ($)
Net sales	12,900,000		$5,875,000	7,025,000
Variable cost
COGS	7,880,500		3,525,000 (1)	4,355,500
Operating cost	3,799,750		1,762,500 (4)	2,037,250
Total variable cost	11,680,250		5,287,500	6,392,750
Contribution margin	1,219,750		587,500	632,250
Less: Controllable fixed cost (6)	475,000	47,500	213,750	213,750
Controllable margin	744,750		373,750	418,500
Less: Non controllable fixed cost (8)	375,000	37,500	150,000	187,500
Contribution by profit center	369,750	85,000	223,750	231,000
Less: Non traceable costs	325,000
Operating income	44,750

Table (1)

Breakdown of Hartford’s contribution:

Particulars	Hartford ($)	Not allocated ($)	Clothing ($)	Cycle & Run ($)
Net sales (2)	7,025,000		4,215,000	2,810,000
Variable cost
COGS (3)	4,355,500		2,950,500	1,405,000
Variable operating cost (5)	2,037,250		1,053,750	983,500
Contribution margin	632,250		210,750	421,500
Controllable fixed cost (7)	213,750	42,750	106,875	64,125
Controllable margin	418,500		103,875	357,375
Non controllable fixed costs (9)	187,500	18,750	103,125	65,625
Contribution by profit center	231,000	61,500	750	291,750

Table (2)

Working notes:

1) Calculate the cost of goods sold (Boston): 

$\begin{array}{c}\text{Cost of goods sold }\left(\text{Boston}\right)=\left(60\%\text{ of boston's sales}\right)\\ =\left(5,875,000\times 60\%\right)\\ =\$3,525,000\end{array}$

2) Calculate the sales of Hartford clothing and cycle:

For Hartford clothing’s sale:

$\begin{array}{c}\text{Sales of hartford clothing}=\left(60\%\text{ of hartford sales}\right)\\ =\left(\$7,025,000\times 60\%\right)\\ =\$4,215,000\end{array}$

For Hartford cycle’s sale:

$\begin{array}{c}\text{Sales of hartford cycle}=\left(60\%\text{ of hartford sales}\right)\\ =\left(\$7,025,000\times 40\%\right)\\ =\$2,810,000\end{array}$

3) Calculate the cost of goods sold (Hartford):

For cost of goods sold of Hartford clothing:

$\begin{array}{c}\left[\begin{array}{l}\text{Cost of goods sold }\\ \left(\text{Hartford clothing}\right)\end{array}\right]=\left(70\%\text{ of Hartford clothing's sales}\right)\\ =\left(\$4,215,000\times 70\%\right)\\ =\$2,950,500\end{array}$

For cost of goods sold of Hartford cycle:

$\begin{array}{c}\left[\begin{array}{l}\text{Cost of goods sold }\\ \text{(Hartford cycle)}\end{array}\right]=\left(50\%\text{ of Hartford cycle's sale}\right)\\ =\left(\$2,810,000\times 50\%\right)\\ =\$1,405,000\end{array}$

4) Calculate the variable operating cost of Boston:

$\begin{array}{c}\text{Operating cost }\left(\text{Boston}\right)=\left(30\%\text{ of Boston's sales}\right)\\ =\left(\$5,875,000\times 30\%\right)\\ =\$1,762,500\end{array}$

5) Calculate the operating cost of Hartford:

For Hartford clothing:

$\begin{array}{c}\left(\begin{array}{l}\text{Operating cost of}\\ \text{ Hartford clothing}\end{array}\right)=\left(25\%\text{ of Hartford clothing's sales}\right)\\ =\left(\$4,215,000\times 25\%\right)\\ =\$1,053,750\end{array}$

For Hartford cycle:

$\begin{array}{c}\left(\begin{array}{l}\text{Operating cost of}\\ \text{ Hartford cycle}\end{array}\right)=\left(35\%\text{ of Hartford cycle's sales}\right)\\ =\left(\$2,810,000\times 35\%\right)\\ =\$983,500\end{array}$

6) Calculate the fixed controllable cost:

For Boston:

$\begin{array}{c}\left(\begin{array}{l}\text{Controllable fixed cost }\\ \text{of boston}\end{array}\right)=\left(45\%\text{ of total cost}\right)\\ =\left(\$475,000\times 45\%\right)\\ =\$213,750\end{array}$

For Hartford:

$\begin{array}{c}\left(\begin{array}{l}\text{Controllable fixed cost }\\ \text{of Hartford}\end{array}\right)=\left(45\%\text{ of total cost}\right)\\ =\left(\$475,000\times 45\%\right)\\ =\$213,750\end{array}$

Not allocated:

$\begin{array}{c}\left(\begin{array}{l}\text{Controllable fixed cost}\\ \text{ not allocated}\end{array}\right)=\left(10\%\text{ of total cost}\right)\\ =\left(\$475,000\times 10\%\right)\\ =\$47,500\end{array}$

7) Calculate the fixed controllable cost of Hartford clothing and cycle:

For Hartford clothing:

$\begin{array}{c}\left(\begin{array}{l}\text{Controllable fixed cost }\\ \text{of Hartford clothing}\end{array}\right)=\left(50\%\text{ of total cost}\right)\\ =\left(\$213,750\times 50\%\right)\\ =\$106,875\end{array}$

For Hartford cycles:

$\begin{array}{c}\left(\begin{array}{l}\text{Controllable fixed cost }\\ \text{of Hartford cycle}\end{array}\right)=\left(30\%\text{ of total cost}\right)\\ =\left(\$213,750\times 30\%\right)\\ =\$64,125\end{array}$

Not allocated:

$\begin{array}{c}\left(\begin{array}{l}\text{Controllable fixed cost}\\ \text{ not allocated}\end{array}\right)=\left(20\%\text{ of total cost}\right)\\ =\left(\$213,750\times 20\%\right)\\ =\$42,750\end{array}$

8) Calculate the non-controllable fixed cost:

For Boston:

$\begin{array}{c}\left(\begin{array}{l}\text{Non controllable fixed cost }\\ \text{of boston}\end{array}\right)=\left(40\%\text{ of total cost}\right)\\ =\left(\$375,000\times 40\%\right)\\ =\$150,000\end{array}$

For Hartford:

$\begin{array}{c}\left(\begin{array}{l}\text{Non controllable fixed cost }\\ \text{of Hartford}\end{array}\right)=\left(\text{50\% of total cost}\right)\\ =\left(\$375,000\times 50\%\right)\\ =\$187,500\end{array}$

Not allocated:

$\begin{array}{c}\left(\begin{array}{l}\text{Non controllable fixed cost}\\ \text{ not allocated}\end{array}\right)=\left(10\%\text{ of total cost}\right)\\ =\left(\$375,000\times 10\%\right)\\ =\$37,500\end{array}$

9) Calculate the fixed non-controllable cost of Hartford clothing and cycle:

For Hartford clothing:

$\begin{array}{c}\left(\begin{array}{l}\text{Non controllable fixed cost }\\ \text{of Hartford clothing}\end{array}\right)=\left(55\%\text{ of total cost}\right)\\ =\left(\$187,500\times 55\%\right)\\ =\$103,125\end{array}$

For Hartford cycle:

$\begin{array}{c}\left(\begin{array}{l}\text{Non controllable fixed cost }\\ \text{of Hartford cycle}\end{array}\right)=\left(35\%\text{ of total cost}\right)\\ =\left(\$187,500\times 35\%\right)\\ =\$65,625\end{array}$

Not allocated:

$\begin{array}{c}\left(\begin{array}{l}\text{Non controllable fixed cost}\\ \text{ not allocated}\end{array}\right)=\left(\text{10\% of total cost}\right)\\ =\left(\$187,500\times 10\%\right)\\ =\$18,750\end{array}$