Variable Costing Income Statement and Effect on Income of Ch

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 s selected and Size M is discontinued and production curtailed, the annual fixed production costs and bed operating expenses could be reduced by $142,500 and28,350, respectively. If proposal 3 is selected it is anticipated that an additional annual expenditure 85 050 or the salary a 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 a 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 remaln so for the foreseeable future. The Income statement for the past year ended December 31, 20YB, Is as follows Size Total $990,000 1,087,500 $945,000 3,022,500 Cost of goods sold: Variable costs Flxed costs Total cost of goods sold $538,500 $718,500 $567,000 $1,824,000 241,000 288,000 250,00 779,000 $779,500 1,006,500 817,000 2,603,000 $210,500 1,000$128,000 419,500 Gross profit Operating expenses: Variable expenses Fixed expenses Total operating expenses $118,100 32,125 $150,225 $60,275 108,750 42,525 $151,275 $(70,275) 5,050 14.250 $99,300 $28,700 11,900 88,900 $400,800 18,700 Income from operations

Solution

Answer 1. Kimbrell Inc. Variable Costing Income Statement For the Year Ended Dec 31, 20Y8 Size S Size M Size L Total Sales                          990,000.00               1,087,500.00                 945,000.00          3,022,500.00 Varaible 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              779,000.00 Operating Expenses                88,900.00 Total Fixed Costs              867,900.00 Income From Operations                18,700.00 Answer 2. Statement of Iincremental Profit if Size M is Discontinued Incremental Revenue Savings in Fixed Costs: Manufacturing Costs                          142,500.00 Operating Expenses                            28,350.00                   170,850.00 Incremental Cost Loss of Contribution - Size M                   260,250.00 Incemental Net Income (Loss)                   (89,400.00) If Size M is discontinue, Net Income is reduced by $89,400 Answer 3. Kimbrell Inc. Variable Costing Income Statement For the Year Ended Dec 31, 20Y8 Size S Size L Total Sales                      2,277,000.00                   945,000.00             3,222,000.00 ($990,000 X 230%) Varaible Cost of Goods Sold                      1,238,550.00                   567,000.00             1,805,550.00 ($538,500 X 230%) Manufacturing Margin                      1,038,450.00                   378,000.00             1,416,450.00 Variable Operating Expenses                          271,630.00                     85,050.00                 356,680.00 ($118,100 X 230%) Contribution Margin                          766,820.00                   292,950.00             1,059,770.00 Fixed Costs: Manufacturing Costs                 779,000.00 Operating Expenses - $88,900 + $85,050                 173,950.00 Total Fixed Costs                 952,950.00 Income From Operations                 106,820.00 Answer 4. Net Income - Proposal 3 is Accepted                          106,820.00 Net Income - Present                            18,700.00 Increase in Net Income                            88,120.00