Question

Knitline Inc. produces high-end sweaters and jackets in a single factory. The following information was provided for the coming year.

	Sweaters	Jackets
Sales	$ 209,600	$ 449,000
Variable cost of goods sold	145,500	196,600
Direct fixed overhead	25,400	47,800

A sales commission of 6% of sales is paid for each of the two product lines. Direct fixed selling and administrative expense was estimated to be $19,900 for the sweater line and $50,400 for the jacket line.

Common fixed overhead for the factory was estimated to be $48,000. Common selling and administrative expense was estimated to be $17,600.

Refer to the list below for the exact wording of a label or an amount description within your income statement.

Labels
Add common fixed expenses
Add direct fixed expenses
Add variable expenses
Less common fixed expenses
Less direct fixed expenses
Less variable expenses
Amount Descriptions
Common fixed overhead
Common selling and administrative
Contribution margin
Direct fixed overhead
Direct selling and administrative
Operating loss
Operating income
Sales
Segment margin
Variable cost of goods sold
Variable selling expenses

1. Prepare a segmented income statement for Knitline for the coming year, using variable costing. Refer to the list of Labels and Amount Descriptions for the exact wording of text items within your income statement. If an amount is negative, first enter a minus sign (-).

Knitline Inc.

Segmented Income Statement

For the Coming Year

1		Sweaters	Jackets	Total
2
3
4
5
6
7
8
9
10
11
12
13
14

2. Suppose that next year, all revenues and costs are expected to remain the same except for direct fixed overhead expense, which will go up by $6,724 for one of the product lines due to costs related to new equipment. Does it matter which line (sweaters or jackets) requires the new equipment? Why?

Complete the statements below that outline the impact of the overhead expense increase. If an amount is negative, first enter a minus sign (-).

•	For the company as a whole, operating income will_________ .
•	For the sweater line, the segment’s margin will be______ . In this case, if profitability is not expected to improve (either by increasing price or decreasing other costs), then line(s) should be dropped.
•	For the jacket line, the segment’s margin will be_______ . In this case, if profitability is not expected to improve (either by increasing price or decreasing other costs), then line(s) should be dropped.

Answer 1

1)

Segmented Income statement
	TOTAL	Sweaters	Jackets
sales	658600	209600	449000
less:variable expense
Variable cost of sales	(342100)	(145500)	(196600)
sales commissions	(39516)	(12576)    [209600*.06]	(26940)    [449000*.06)
Total variable expense	(381616)	(158076)	(223540)
contribution margin	276984	51524	225460
Less:fixed cost
Direct fixed overhead	(73200)	(25400)	(47800)
Direct fixed selling and administrative expense	(70300)	(19900)	(50400)
Total traceable fixed cost	(143500)	(45300)	(98200)
Segment margin	133484	6224	127260
less:Common fixed cost [48000+17600]	(65600)
Net operating income	67884

2)

a)For the company as a whole, operating income will : 67884-6724 =61160

b)For the sweater line, the segment’s margin will be $ -500    [6224-6724] In this case, if profitability is not expected to improve (either by increasing price or decreasing other costs), then sweater line(s) should be dropped.

c)For the jacket line, the segment’s margin will be 120536    [127260-6724].In this case, if profitability is not expected to improve (either by increasing price or decreasing other costs), then sweater line(s) should be dropped (since even after that expense ,the segment margin of jacket line is more than sweater line )