Question

Kimbrell Inc. manufactures three sizes of utility tables—small (S), medium (M), and large (L). The income statement has consistently indicated a net loss for the M size, and management is considering three proposals: (1) continue Size M, (2) discontinue Size M and reduce total output accordingly, or (3) discontinue Size M and conduct an advertising campaign to expand the sales of Size S so that the entire plant capacity can continue to be used.

If Proposal 2 is selected and Size M is discontinued and production curtailed, the annual fixed production costs and fixed operating expenses could be reduced by $142,500 and $28,350, respectively. If Proposal 3 is selected, it is anticipated that an additional annual expenditure of $85,050 for the salary of an assistant brand manager (classified as a fixed operating expense) would yield an additional 130% in Size S sales volume. It is also assumed that the increased production of Size S would utilize the plant facilities released by the discontinuance of Size M.

The sales and costs have been relatively stable over the past few years, and they are expected to remain so for the foreseeable future. The income statement for the past year ended December 31, 20Y8, is as follows:

	Size
	S		M		L		Total
Sales	$990,000		$1,087,500		$945,000		$3,022,500
Cost of goods sold:
Variable costs	$(538,500)		$(718,500)		$(567,000)		$(1,824,000)
Fixed costs	(241,000)		(288,000)		(250,000)		(779,000)
Total cost of goods sold	$(779,500)		$(1,006,500)		$(817,000)		$(2,603,000)
Gross profit	$210,500		$81,000		$128,000		$419,500
Operating expenses:
Variable expenses	$(118,100)		$(108,750)		$(85,050)		$(311,900)
Fixed expenses	(32,125)		(42,525)		(14,250)		(88,900)
Total operating expenses	$(150,225)		$(151,275)		$(99,300)		$(400,800)
Operating income (loss)	$60,275		$(70,275)		$28,700		$18,700

Required:

1. Prepare an income statement for the past year in the variable costing format. Data for each size should be reported through contribution margin. The fixed costs should be deducted from the total contribution margin, as reported in the “Total” column, to determine operating income.

Kimbrell Inc.
Variable Costing Income Statement
For the Year Ended December 31, 20Y8
	Size S	Size M	Size L	Total
Sales	$	$	$	$
Variable cost of goods sold
Manufacturing margin	$	$	$	$
Variable operating expenses
Contribution margin	$	$	$	$
Fixed costs:
Manufacturing costs				$
Operating expenses
Total fixed costs				$
Operating income				$

2. Based on the income statement prepared in (1) and the other data presented above, determine the amount by which total annual operating income would be reduced below its present level if Proposal 2 is accepted.
$

3. Prepare an income statement in the variable costing format, indicating the projected annual operating income if Proposal 3 is accepted. Data for each style should be reported through contribution margin. The fixed costs should be deducted from the total contribution margin as reported in the “Total” column. For purposes of this problem, the additional expenditure of $85,050 for the assistant brand manager’s salary can be added to the fixed operating expenses.

Kimbrell Inc.
Variable Costing Income Statement
For the Year Ended December 31, 20Y8
	Size S	Size L	Total
Sales	$	$	$
Variable cost of goods sold
Manufacturing margin	$	$	$
Variable operating expenses
Contribution margin	$	$	$
Fixed costs:
Manufacturing costs			$
Operating expenses
Total fixed costs			$
Operating income			$

4. By how much would total annual operating income increase above its present level if Proposal 3 is accepted?
$

Answer 1

Ans 1)

Ans 2) Amount by which total annual operating income would be reduced if Proposal 2 is accepted

Particulars	Amount
Contribution Margin of M	$260,250
Less : Reduction in Fixed Costs	($142,500)
Less : Reduction in Fixed Operating Expenses	($28,350)
Reduction in Annual Operating Income From Operation	$89,400

Ans 3)

Revised Sales Value of Size S = ($990,000 + 130% of $990,000)

= $2,277,000

Accordingly, Revised Variable Cost = ($538,500 + 130% of $538,500)

= $1,238,550

Revised Variable Expenses = ($118,100 + 130% of $118,100)

= $271,630

Ans 4) if Proposal 3 is accepted, Annual operating income increases by

Income From Operation in Part 3	$106,820
Income From Operation in Part 1	$18,700
Increase in Income	$88,120