Chapter 6, Problem 28P

1.

To determine

To prepare: A contribution format income statement.

Introduction: Income Statement includes the information of net income earn or net loss suffered by the company. The expenses deducting from revenue and the resultant is net income or loss to the company. This is informative report that helps the user of financial information to take decision.

Answer to Problem 28P

Solution: The operating income is $15,000.

Explanation of Solution

Prepare contribution format income statement,

Contribution margin income statement
Particulars	Total($)	C($)	T($)	H($)
Sales	300,000	90,000	150,000	60,000
Less: Variable expenses
Printing cost	102,000	27,000	63,000	12,000
Sales commission$\left(\text{Sales}\times 10\%\right)$	30,000	9,000	15,000	6,000
Total variable expense (A)	132,000	36,000	78,000	18,000
Contribution margin (B)	168,000	54,000	72,000	42,000
Less: Fixed cost
Advertising	36,000	13,500	19,500	3,000
Salaries	33,000	18,000	9,000	6,000
Equipment depreciation	9,000	2,700	4,500	1,800
Warehouse rent	12,000	1,800	6,000	4,200
Total fixed cost (C)	90,000	36,000	39,000	15,000
Product line segment margin (D)$\left(\text{B}-\text{C}\right)$	78,000	18,000	33,000	27,000
Less: Common fixed expenses
General sales	18,000
General administration	42,000
Depreciation- office facilities	3,000
Total common fixed expense (E)	63,000
Net operating income $\left(\text{D}-\text{E}\right)$	15,000

Table (1)

Working Notes:

Calculate the amount of equipment depreciation,

Particulars	Total($)	C($)	T($)	H($)
Percentage		30%	50%	20%
Equipment depreciation$\left(\$9,000\times \text{ precentage}\right)$	9,000	2,700	4,500	1,800

Table (2)

Calculate the amount of warehouse rent,

Particulars	C($)	T($)	H($)
Square feet (A)	7,200	24,000	16,800
Rental cost per square feet(B)	3	3	3
Annual rental cost (C)$\left(\text{A}\times \text{B}\right)$	21,600	72,000	50,400
Warehouse rent per month$\left(\frac{\text{C}}{12}\right)$	1,800	6,000	4,200

Table (3)

Thus, the operating income is $15,000.

2.

a.

To determine

To explain: The decision of management to eliminate the C from product line is it valid.

Answer to Problem 28P

Solution: The management decision to eliminate C from product line is invalid.

Explanation of Solution

C will generate a net profit of $18,000, so it is not justifiable to eliminate C from product line by management.

Thus, the intention of management to eliminate C from product line is invalid.

b.

To determine

To identify: The decision of management to focus all available resources on promoting the T. Compute the contribution margin ratio for each product.

Answer to Problem 28P

Solution: The decision of management to focus all available resources on promoting the T is unfair as the contribution margin of H is the highest not of T.

Explanation of Solution

Statement that shows the calculation of contribution margin ratio.

Particulars	C($)	T($)	H($)
Contribution margin (A)(calculated in part 1)	54,000	72,000	42,000
Sales revenue (given) (B)	90,000	150,000	60,000
Contribution margin ratio$\left[\frac{\text{A}}{\text{B}}\right]$	0.6	0.48	0.7

Table (4)

Thus, the decision of management is unfair to focus all available resources on promoting the T.