Question

For the coming year, Archway Computers Inc. expects to produce and sell 200,000 computers. Of these, 80,000 will be consumer (personal) computers and 120,000 will be small business computers. Common fixed overhead is $700,000. Additional information for the coming year is as follows:

Consumer Computers      Small Business Computers

Price                                                               $780                                       $2,300

Unit Direct Materials                                    500                                         1,800

Unit Direct Labour                                        160                                            290

Unit Variable Overhead                                40                                              75

Unit Variable Selling Expenses                   75                                              70

Total Direct Fixed Overhead               120,000                                    200,000

                        

Fixed selling and administrative expense for Archway Computers Inc. is $3,460,000 per year.

Required:

Calculate the unit variable cost under variable costing. Is this cost the same as unit variable product cost? Why or why not?

Prepare a segmented variable-costing income statement for next year. The segments correspond to product lines: consumer computers and small business computers.

Answer 1

Solution

Archway Computers

1. Computation of unit variable cost under variable costing method:

	Consumer Computers	Small Business Computers
Unit variable cost:
Direct material	$500	$1,800
Direct labot	$160	$290
variable overhead	$40	$75
Variable selling expenses	$75	$70
total unit variable cost	$775	$2,235
Unit Variable Product Cost
	Consumer Computers	Small Business Computers
Unit variable product cost:
Direct material	$500	$1,800
Direct labot	$160	$290
variable overhead	$40	$75
Total unit variable product cost	$700	$2,165

Unit variable cost and unit variable product cost are different. The difference is due to the inclusion of variable selling expenses in the unit variable cost. The unit variable product cost comprises those costs that are incurred in the production such as direct material cost, direct labor cost and variable overhead. Selling expenses are not part of production cost.

Segmented Variable Costing Income Statement

	Consumer Computers	Small Business Computers	Total
Sales (units)	80,000	120,000	200,000
Sales (Dollars)	$62,400,000	$276,000,000	338,400,000
Variable costs	$62,000,000	$268,200,000	330,200,000
Contribution margin	$400,000	7,800,000	$8,200,000
Direct fixed overhead	$120,000	$200,000	$320,000
Segment Margin	$280,000	$7,600,000	$7,880,000
Common Fixed Costs			$3,460,000
Operating Income			$4,420,000

Sales

• Consumer Computers = 80,000 x $780 = $62,400,000
• Business Computers = 120,000 x 2,300 = $276,000,000

Variable cost

• Consumer Computers = 80,000 x $775 = $62,000,000
• Business Computers = 120,000 x 2,235 = $268,200,000

Contribution margin = sales – variable cost

Segment margin = contribution margin – direct fixed overhead

Operating income = total segment margin – common fixed costs