Question

1. 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

1.
Kimbrell Inc.,
Variable Costing Income Statement
For the Year Ended December 31,20Y8
	S	M	L	Total
Sales	$990,000	$1,087,500	$945,000	$3,022,500
Variable cost of goods sold	($538,500)	($718,500)	($567,000)	($1,824,000)
Manufacturing margin	$451,500	$369,000	$378,000	$1,198,500
Variable operating expenses	($118,100)	($108,750)	($85,050)	($311,900)
Contribution margin	$333,400	$260,250	$292,950	$886,600
Fixed costs
Manufacturing costs	($241,000)	($288,000)	($250,000)	($779,000)
Operating expenses	($32,125)	($42,525)	($14,250)	($88,900)
Total fixed costs	($273,125)	($330,525)	($264,250)	($867,900)
Operating income	$60,275	($70,275)	$28,700	$18,700
2.
Kimbrell Inc.,
Variable Costing Income Statement
For the Year Ended December 31,20Y8
	S	L	Total
Sales	$990,000	$945,000	$1,935,000
Variable cost of goods sold	($538,500)	($567,000)	($1,105,500)
Manufacturing margin	$451,500	$378,000	$829,500
Variable operating expenses	($118,100)	($85,050)	($203,150)
Contribution margin	$333,400	$292,950	$626,350
Fixed costs
Manufacturing costs	($241,000)	($250,000)	($491,000)
Reduction in manufacturing costs			$142,500
Operating expenses	($32,125)	($14,250)	($46,375)
Reduction in operating expenses			$28,350
Total fixed costs	($273,125)	($264,250)	($366,525)
Operating income	$60,275	$28,700	$259,825
3.
Kimbrell Inc.,
Variable Costing Income Statement
For the Year Ended December 31,20Y8
	S	L	Total
Sales	$2,277,000	$945,000	$3,222,000
Variable cost of goods sold	($1,238,550)	($567,000)	($1,805,550)
Manufacturing margin	$1,038,450	$378,000	$1,416,450
Variable operating expenses	($271,630)	($85,050)	($356,680)
Contribution margin	$766,820	$292,950	$1,059,770
Fixed costs
Manufacturing costs	($241,000)	($250,000)	($491,000)
Operating expenses	($117,175)	($14,250)	($131,425)
Total fixed costs	($358,175)	($264,250)	($622,425)
Operating income	$408,645	$28,700	$437,345
4.
If the proposal 3 is accepted the increase in operating income would be as under:
Operating income under Proposal 3	$437,345
Less : Original operating income	($18,700)
Increase in operating income if proposal 3 is accepted	$418,645
Working Notes
Computation of increase in value of sales and variable costs if proposal 3 is accepted
	Sales	Variable cost of goods sold	Variable operating cost	Fixed operating cost
Initial value	$990,000	$538,500	$118,100	($32,125)
Increase%	130%	130%	130%
Increase	$1,287,000	$700,050	$153,530	($85,050)
Revised value	$2,277,000	$1,238,550	$271,630	($117,175)