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

1. Income Statement
KIMBRELL, INCC.
Variable Costing Income Statement
For the year ended 31st January, 20Y8
Particular	Size			Total
	S	M	L
Sales	9,90,000	10,87,500	9,45,000	30,22,500
Variable cost of goods sold	5,38,500	7,18,500	5,67,000	18,24,000
Manufacturing Margin	4,51,500	3,69,000	3,78,000	11,98,500
Variable Operating Exp,	1,18,100	1,08,750	85,050	3,11,900
Contribution margin	3,33,400	2,60,250	2,92,950	8,86,600
Fixed Costs
Manufacturing Cost				7,79,000
Operating expenses				88,900
Total Fixed Cost				8,67,900
Income from Operation				18,700
2. If proposal 2 is accepted
Contribution margin of M		2,60,250
Less: Reduction in fixed costs	1,42,500
Less: Reduction in fixed operating expenses	28,350	1,70,850
Reduction in annual income from operation		89,400
3. Income Statement
KIMBRELL, INCC.
Variable Costing Income Statement
For the year ended 31st January, 20X8
Increase in sale volume of Size S by additional 130%
Sale value
990000*130/100 = 1287000     then 990000+1287000 = 2277000
Variable cost
538500*130/100 = 700050 then 538500+700050 = 1238550
Variable expenses
118100*130/100 = 153530    then 118100+153530 = 271630
Assuming that the cost of Size S is also increased by 130%.
If cost of Size M is added to Size S then relatively change the figure of Variable cost and Variable Expenses.
Particular	Size		Total
	S	L
Sales	22,77,000	9,45,000	32,22,000
Variable cost of goods sold	12,38,550	5,67,000	18,05,550
Manufacturing Margin	10,38,450	3,78,000	14,16,450
Variable Operating Exp,	2,71,630	85,050	3,56,680
Contribution margin	7,66,820	2,92,950	10,59,770
Fixed Costs
Manufacturing Cost			7,79,000
Operating expenses (including additional salary)			1,73,950
Total Fixed Cost			9,52,950
Income from Operation			1,06,820
4. If proposal 3 is accepted
Income from operation, proposal 3	1,06,820
Income from operation, present condition (part 1)	18,700
Increase in income from operation	88,120