Question

Exercise 6-7 Segmented Income Statement [LO6-4]

Shannon Company segments its income statement into its North and South Divisions. The company’s overall sales, contribution margin ratio, and net operating income are $700,000, 50%, and $56,000, respectively. The North Division’s contribution margin and contribution margin ratio are $217,500 and 75%, respectively. The South Division’s segment margin is $60,000. The company has $84,000 of common fixed expenses that cannot be traced to either division.

  

Required:

Prepare an income statement for Shannon Company that uses the contribution format and is segmented by divisions. (Round your percentage answers to 1 decimal place (i.e .1234 should be entered as 12.3)) Divisions Total Company North South Amount % Amount % Amount %

Exercise 6-9 Variable and Absorption Costing Unit Product Costs and Income Statements [LO6-1, LO6-2, LO6-3]

Walsh Company manufactures and sells one product. The following information pertains to each of the company’s first two years of operations:

  

Variable costs per unit:
Manufacturing:
Direct materials		$ 25
Direct labor		$ 15
Variable manufacturing overhead		$ 5
Variable selling and administrative		$ 2
Fixed costs per year:
Fixed manufacturing overhead	$	250,000
Fixed selling and administrative expenses	$	80,000

During its first year of operations, Walsh produced 50,000 units and sold 40,000 units. During its second year of operations, it produced 40,000 units and sold 50,000 units. The selling price of the company’s product is $60 per unit.

Required:
1.	Assume the company uses variable costing:

a.	Compute the unit product cost for year 1 and year 2. Year 1 Year 2 Unit product cost

b.

Prepare an income statement for year 1 and year 2. Walsh Company Income Statement Year 1 Year 2 Variable expenses Total variable expenses Fixed expenses Total fixed expenses 2. Assume the company uses absorption costing: a. Compute the unit product cost for year 1 and year 2. (Round your answer to 2 decimal places.)

	Year 1 Year 2 Unit product cost

b.	Prepare an income statement for year 1 and year 2. (Round your intermediate calculations to 2 decimal places.) Walsh Company Income Statement Year 1 Year 2

3.	Reconcile the difference between variable costing and absorption costing net operating income in year 1 and year 2. Year 1 Year 2 Variable costing net operating income (loss) Absorption costing net operating income

Answer 1

Shannon company
		Income statement
				overall	north div	south div
Sales				700,000	290000	410,000
less :Variable costs				350,000	72500	277,500
Contribution				350,000	217,500	132,500
less:Fixed expenses that can be traced				210,000	137,500	72,500
Segment margin				140,000	80,000	60,000
less:fixed expenses that cannot be traced				84,000
Net operating income				56,000

	unit product cost
a.					Year 1	Year 2
	unit product cost				45	45
	notes
	Direct materials					25
	direct labor					15
	Variable manufacturing overhead					5
	unit product cost					45
b.		income statement
					year 1	year 2
	Sales	(40000*54);(50000*54)			2400000	3000000
	Variable expenses
	Variable cost of goods sold				1800000	2250000
	Variable selling and adm				80000	100000
	total variable expense				1880000	2350000
	Contribution margin				520000	650000
	Fixed expense
	Fixed manufacturing overhead				250,000	250,000
	Fixed selling & adm expense				80,000	80,000
	total fixed expense				330,000	330,000
	Net income				190,000	320,000
2)	unit product cost
a)					Year 1	Year 2
	unit product cost				50	51.25
	notes					year 1	year 2
	Direct materials					25	25
	direct labor					15	15
	Variable manufacturing overhead					5	5
	FMOH (250,000/50,000)….(250,000/40000)					5	6.25
	unit product cost					50	51.25
b)		income statement
					year 1	year 2
	Sales				2400000	3000000
	cost of goods sold				2000000	2550000
	Gross margin				400000	450000
	Selling and administrative expense				160,000	180,000
	Net income				240,000	270000
	cost of goods sold for year 2 (10,000*50+40000*51.25)
3)	Reconcilaition						year 1	year 2
	Variable costing net operating income (loss)						190,000	320,000
	add:Deferrred fixed overhead in ending inventory (10000*5)						50,000
	less:Fixed overhead realeased in beginning inventory(10000*5)							-50,000
	Absoption costing net operatin income (loss)						240,000	270,000