Question

Variable Costing Income Statement and Effect on Income of Change in Operations

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
Income from operations	$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 style 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 income from operations. Enter all amounts as positive numbers.

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				$
Income from operations				$

2. Based on the income statement prepared in (1) and the other data presented above, determine the amount by which total annual income from operations 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 income from operations 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. Enter all amounts as positive numbers.

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			$
Income from operations			$

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

Answer 1

Solution 1:

Kimbrell Inc.
Variable Costing Income Statement
For the Year Ended December 31, 20Y8
Particulars	Size S	Size M	Size L	Total
Sales	$990,000.00	$1,087,500.00	$945,000.00	$3,022,500.00
Variable cost of goods sold	$538,500.00	$718,500.00	$567,000.00	$1,824,000.00
Manufacturing margin	$451,500.00	$369,000.00	$378,000.00	$1,198,500.00
Variable operating expenses	$118,100.00	$108,750.00	$85,050.00	$311,900.00
Contribution margin	$333,400.00	$260,250.00	$292,950.00	$886,600.00
Fixed costs:
Manufacturing costs	$241,000.00	$288,000.00	$250,000.00	$779,000.00
Operating expenses	$32,125.00	$42,525.00	$14,250.00	$88,900.00
Total fixed costs	$273,125.00	$330,525.00	$264,250.00	$867,900.00
Income from operations	$60,275.00	-$70,275.00	$28,700.00	$18,700.00

Solution 2:

If proposal to is accepted then loss of contribution margin from Size M = $260,250

Savings by reduction in fixed costs = $142,500 + $28,350 = $170,850

Reduction in income from operation if proposal 2 is accepted = $260,250 - $170,850 = $89,400

Solution 3:

Variable cost of goods sold to sales on Size S = $538,500 / $990,000 = 54.393939%

Variable operating to sales on Size S = $118,100 / $990,000 = 11.92929292%

Kimbrell Inc.
Variable Costing Income Statement
For the Year Ended December 31, 20Y8
Particulars	Size S	Size L	Total
Sales	$1,287,000.00	$945,000.00	$2,232,000.00
Variable cost of goods sold	$700,050.00	$567,000.00	$1,267,050.00
Manufacturing margin	$586,950.00	$378,000.00	$964,950.00
Variable operating expenses	$153,530.00	$85,050.00	$238,580.00
Contribution margin	$433,420.00	$292,950.00	$726,370.00
Fixed costs:
Manufacturing costs	$241,000.00	$250,000.00	$491,000.00
Operating expenses	$117,175.00	$14,250.00	$131,425.00
Total fixed costs	$358,175.00	$264,250.00	$622,425.00
Income from operations	$75,245.00	$28,700.00	$103,945.00

Solution 4:

Total annual income increase above its present level if Proposal 3 is accepted = $103,945 - $18,700 = $85,245