Continental Industries is a diversified corporation withseparate operating divisions. Each divisionâs performance isevaluated on the basis of profit and return on investment. The AirComfort Division manufactures and sells air-conditioner units. Thecoming yearâs budgeted income statement, which follows, is basedupon a sales volume of 15,000 units.â
AIR COMFORT DIVISIONBudgeted Income Statement(In thousands)
Total Per Unit
Sales revenue $12,000 $800
Manufacturingcosts:
Compressor $2,100 $140
Other direct material 1,110 74
Direct labor 900 60
Variable overhead 1,350 90
Fixed overhead 96064
Total manufacturing costs $6,420$428
Gross margin $5,580$372
Operatingexpenses:
Variable selling $540$36
Fixed selling 570 38
Fixed administrative 1,14076
Total operating expenses $2,250$150
Net income before taxes $3,330 $222
Air Comfortâs division manager believes sales can be increasedif the price of the air-conditioners is reduced. A market researchstudy by an independent firm indicates that a 5 percent reductionin the selling price would increase sales volume 16 percent or2,400 units. The division has sufficient production capacity tomanage this increased volume with no increase in fixed costs.
The Air Comfort Division uses acompressor in its units, which it purchases from an outsidesupplier at a cost of $140 per compressor. The Air Comfort Divisionmanager has asked the manager of the Compressor Division aboutselling compressor units to Air Comfort. The Compressor Divisioncurrently manufactures and sells a unit to outside firms which issimilar to the unit used by the Air Comfort Division. Thespecifications of the Air Comfort Division compressor are slightlydifferent, which would reduce the Compressor Divisionâs directmaterial cost by $3 per unit. In addition, the Compressor Divisionwould not incur any variable selling costs in the units sold to theAir Comfort Division. The manager of the Air Comfort Division wantsall of the compressors it uses to come from one supplier and hasoffered to pay $100 for each compressor unit.
The Compressor Division has thecapacity to produce 75,000 units. Its budgeted income statement forthe coming year, which follows, is based on a sales volume of64,000 units without considering Air Comfortâs proposal.
COMPRESSOR DIVISIONBudgeted Income Statement(In thousands)
TotalPer Unit
Sales revenue $12,800$200
Manufacturingcosts:
Direct material $1,536$24
Direct labor 1,02416
Variable overhead 1,28020
Fixed overhead 1,40822
Total manufacturing costs $5,248$82
Gross margin $7,552$118
Operatingexpenses:
Variable selling $768$12
Fixed selling 5128
Fixed administrative 89614
Total operating expenses $2,176$34
Net income before taxes $5,376$84
1. Independently of your answer to Required 1-a, assume the AirComfort Division needs 17,400 units. Calculate theincrease/decrease in net income before taxes for the CompressorDivision if it supplies the 17,400 compressor units for $100 each.(Round intermediate calculations to 2 decimal places andyour final answer to the nearest whole dollar amount. Enter youranswer in dollars and not in thousands.
Decrease in net income before taxes of $ _____________?
2. Independently of your answer to Required 1-a, assume the AirComfort Division needs 17,400 units. Calculate theincrease/decrease in net income before taxes for ContinentalIndustries if the Compressor Division supplies the 17,400compressor units for $100 each. (Enter your answer indollars and not in thousands.)
Increase in net income before taxes of $ _________________?
Continental Industries is a diversified corporation withseparate operating divisions. Each divisionâs performance isevaluated on the basis of profit and return on investment. The AirComfort Division manufactures and sells air-conditioner units. Thecoming yearâs budgeted income statement, which follows, is basedupon a sales volume of 15,000 units.â
AIR COMFORT DIVISIONBudgeted Income Statement(In thousands)
Total Per Unit
Sales revenue $12,000 $800
Manufacturingcosts:
Compressor $2,100 $140
Other direct material 1,110 74
Direct labor 900 60
Variable overhead 1,350 90
Fixed overhead 96064
Total manufacturing costs $6,420$428
Gross margin $5,580$372
Operatingexpenses:
Variable selling $540$36
Fixed selling 570 38
Fixed administrative 1,14076
Total operating expenses $2,250$150
Net income before taxes $3,330 $222
Air Comfortâs division manager believes sales can be increasedif the price of the air-conditioners is reduced. A market researchstudy by an independent firm indicates that a 5 percent reductionin the selling price would increase sales volume 16 percent or2,400 units. The division has sufficient production capacity tomanage this increased volume with no increase in fixed costs. |
The Air Comfort Division uses acompressor in its units, which it purchases from an outsidesupplier at a cost of $140 per compressor. The Air Comfort Divisionmanager has asked the manager of the Compressor Division aboutselling compressor units to Air Comfort. The Compressor Divisioncurrently manufactures and sells a unit to outside firms which issimilar to the unit used by the Air Comfort Division. Thespecifications of the Air Comfort Division compressor are slightlydifferent, which would reduce the Compressor Divisionâs directmaterial cost by $3 per unit. In addition, the Compressor Divisionwould not incur any variable selling costs in the units sold to theAir Comfort Division. The manager of the Air Comfort Division wantsall of the compressors it uses to come from one supplier and hasoffered to pay $100 for each compressor unit. |
| The Compressor Division has thecapacity to produce 75,000 units. Its budgeted income statement forthe coming year, which follows, is based on a sales volume of64,000 units without considering Air Comfortâs proposal. COMPRESSOR DIVISIONBudgeted Income Statement(In thousands) TotalPer Unit Sales revenue $12,800$200 Manufacturingcosts: Direct material $1,536$24 Direct labor 1,02416 Variable overhead 1,28020 Fixed overhead 1,40822 Total manufacturing costs $5,248$82 Gross margin $7,552$118 Operatingexpenses: Variable selling $768$12 Fixed selling 5128 Fixed administrative 89614 Total operating expenses $2,176$34 Net income before taxes $5,376$84 1. Independently of your answer to Required 1-a, assume the AirComfort Division needs 17,400 units. Calculate theincrease/decrease in net income before taxes for the CompressorDivision if it supplies the 17,400 compressor units for $100 each.(Round intermediate calculations to 2 decimal places andyour final answer to the nearest whole dollar amount. Enter youranswer in dollars and not in thousands. |
Decrease in net income before taxes of $ _____________?
2. Independently of your answer to Required 1-a, assume the AirComfort Division needs 17,400 units. Calculate theincrease/decrease in net income before taxes for ContinentalIndustries if the Compressor Division supplies the 17,400compressor units for $100 each. (Enter your answer indollars and not in thousands.) |
Increase in net income before taxes of $ _________________?
Related questions
Advance Products, Inc., has just organized a new division tomanufacture and sell specially designed tables using selecthardwoods for personal computers. The divisionâs monthly costs areshown in the schedule below: |
| Manufacturingcosts: | |||
| Variablecosts per unit: | |||
| Direct materials | $86 | ||
| Variable manufacturingoverhead | $6 | ||
| Fixedmanufacturing overhead costs (total) | $254,200 | ||
| Selling andadministrative costs: | |||
| Variable | 13 | % of sales | |
| Fixed(total) | $161,000 | ||
Advance Products regards all ofits workers as full-time employees and the company has along-standing no-layoff policy. Furthermore, production is highlyautomated. Accordingly, the company includes its labor costs in itsfixed manufacturing overhead. The tables sell for $260 each. |
| During the first month ofoperations, the following activity was recorded: |
| Units produced | 4,100 |
| Units sold | 3,300 |
| Required: |
| 1. | Compute the unit product costunder absorption costing and variable costing. |
| Unit ProductCost | ||
| a. | Absorption costing | |
| b. | Variable costing | |
| 2. | Prepare an income statement for the month using absorptioncosting. (Input all amounts as positive values exceptlosses which should be indicated by a minus sign. Omit the "$" signin your response.) |
| Absorption Costing Income Statement | |
| (Click toselect)Gross marginCost of goods soldSalesNet operating income(loss)Selling and administrative expenses | $ |
| (Click toselect)Gross marginCost of goods soldSelling and administrativeexpensesNet operating income (loss)Sales | |
| (Click toselect)SalesSelling and administrative expensesNet operating income(loss)Gross marginCost of goods sold | |
| (Click toselect)Selling and administrative expensesNet operating income(loss)SalesCost of goods soldGross margin | |
| (Click toselect)SalesGross marginSelling and administrative expensesCost ofgoods soldNet operating income (loss) | $ |
| 3. | Prepare a contribution format income statement for the monthusing variable costing. (Input all amounts as positivevalues except losses which should be indicated by a minus sign.Omit the "$" sign in your response.) |
| Variable Costing Income Statement | ||
| (Click toselect)Fixed manufacturing overheadVariable cost of goods soldFixedselling and administrative expensesContribution marginNet operatingincome (loss)Variable selling and administrative expensesSales | $ | |
| Variableexpenses: | ||
| (Click toselect)Contribution marginNet operating income (loss)Fixedmanufacturing overheadVariable selling and administrativeexpensesVariable cost of goods soldFixed selling and administrativeexpensesSales | $ | |
| (Click to select)Variablecost of goods soldVariable selling and administrative expensesFixedselling and administrative expensesSalesNet operating income(loss)Fixed manufacturing overheadContribution margin |
|
|
| (Click toselect)Contribution marginVariable selling and administrativeexpensesVariable cost of goods soldNet operating income(loss)SalesFixed manufacturing overheadFixed selling andadministrative expenses | ||
| Fixed expenses: | ||
| (Click toselect)SalesFixed selling and administrative expensesVariable costof goods soldFixed manufacturing overheadNet operating income(loss)Variable selling and administrative expensesContributionmargin | ||
| (Click toselect)SalesContribution marginFixed manufacturing overheadNetoperating income (loss)Variable cost of goods soldFixed selling andadministrative expensesVariable selling and administrativeexpenses |
|
|
| (Click toselect)Variable cost of goods soldNet operating income (loss)Fixedselling and administrative expensesVariable selling andadministrative expensesFixed manufacturingoverheadSalesContribution margin | $ | |
| 5. | Reconcile the absorption costing and variable costing netoperating incomes in (2) and (3) above. (Loss amountsand amounts to be deducted shouldbe indicated with a minus sign. Omit the "$" sign in yourresponse.) |
| Reconciliation of Variable Costing and Absorption Costing NetOperating Incomes | |
| Variable costing netoperating income (loss) | $ |
| Add (deduct) fixedmanufacturing overhead cost deferred in (released from) inventory under absorption costing | |
| Absorption costingnet operating income (loss) | $ |
