Chapter 8, Problem 55P

1.

To determine

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

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:

$\begin{array}{c}\text{Sales}=\text{Units sold}\times \text{Sales price}\\ =65,000\text{units}\times \$24\\ =\$1,560,000\end{array}$

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

Calculation of sales for coffee makers:

$\begin{array}{c}\text{Sales}=\text{Units sold}\times \text{Sales price}\\ =75,000\text{units}\times \$29\\ =\$2,175,000\end{array}$

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

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

$\begin{array}{c}\text{Variable cost of goods sold}=\text{Units sold}\times \text{Variable expense per unit}\\ =65,000\text{units}\times \$18\\ =\$1,170,000\end{array}$

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:

$\begin{array}{c}\text{Variable cost of goods sold}=\text{Units sold}\times \text{Variable expense per unit}\\ =75,000\text{units}\times \$27\\ =\$2,025,000\end{array}$

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

3. Calculation of common fixed expenses:

$\begin{array}{c}\text{Common fixed expenses}=\left(\begin{array}{l}\text{Total fixed costs}-\text{Direct fixed expense for blenders}\\ -\text{Direct fixed expense for coffee makers}\end{array}\right)\\ =\$340,000-\$184,000-\$142,500\\ =\$13,500\end{array}$

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.

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.

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:

$\begin{array}{c}\text{Sales}=\left(\text{Units sold}\times \text{Sales price}\right)+\left(\text{Additional units}\times \text{Sales price}\right)\\ =\left(65,000\text{units}\times \$24\right)+\left(\$10,000\text{units}\times \$21.5\right)\\ =\$1,560,000+\$215,000\\ =\$1,775,000\end{array}$

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

Calculation of sales for coffee makers:

$\begin{array}{c}\text{Sales}=\text{Units sold}\times \text{Sales price}\\ =75,000\text{units}\times \$29\\ =\$2,175,000\end{array}$

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

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

$\begin{array}{c}\text{Variable cost of goods sold}=\left(\text{Units sold}+\text{Additional units}\right)\\ \times \text{Variable expense per unit}\\ =\left(65,000\text{units}+10,000\text{units}\right)\times \$18\\ =75,000\text{units}\times \$18\\ =\$1,350,000\end{array}$

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:

$\begin{array}{c}\text{Variable cost of goods sold}=\text{Units sold}\times \text{Variable expense per unit}\\ =75,000\text{units}\times \$27\\ =\$2,025,000\end{array}$

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

3. Calculation of common fixed expenses:

$\begin{array}{c}\text{Common fixed expenses}=\left(\begin{array}{l}\text{Total fixed costs}-\text{Direct fixed expense for blenders}\\ -\text{Direct fixed expense for coffee makers}\end{array}\right)\\ =\$340,000-\$184,000-\$142,500\\ =\$13,500\end{array}$

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