1) Kimbrell Inc. manufactures three sizes of utility tablessmall (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, 2016, is as follows:

1		Size S	Size M	Size L	Total
2	Sales	$990,000.00	$1,087,500.00	$945,000.00	$3,022,500.00
3	Cost of goods sold:
4	Variable costs	$538,500.00	$718,500.00	$567,000.00	$1,824,000.00
5	Fixed costs	241,000.00	288,000.00	250,000.00	779,000.00
6	Total cost of goods sold	$779,500.00	$1,006,500.00	$817,000.00	$2,603,000.00
7	Gross profit	$210,500.00	$81,000.00	$128,000.00	$419,500.00
8	Less operating expenses:
9	Variable expenses	$118,100.00	$108,750.00	$85,050.00	$311,900.00
10	Fixed expenses	32,125.00	42,525.00	14,250.00	88,900.00
11	Total operating expenses	$150,225.00	$151,275.00	$99,300.00	$400,800.00
12	Income from operations	$60,275.00	$(70,275.00)	$28,700.00	$18,700.00

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.*

2.

Based on the income statement prepared in (1) and the other data presented, 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 managers salary can be added to the fixed operating expenses.*

4.

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

* Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. A colon (:) will automatically appear if it is required. Enter all amounts as positive numbers.

Labels December 31, 2016 December 31, 2017 For the Year Ended December 31, 2016 For the Year Ended December 31, 2017

Amount Descriptions Contribution margin Cost of goods sold Fixed manufacturing costs Fixed operating expenses Gross profit Income from operations Manufacturing margin Sales Total fixed costs Variable cost of goods sold Variable operating expenses

2) During the first month of operations ended July 31, 2016, YoSan Inc. manufactured 2,400 flat panel televisions, of which 2,000 were sold. Operating data for the month are summarized as follows:

1	Sales		$2,150,000.00
2	Manufacturing costs:
3	Direct materials	$960,000.00
4	Direct labor	420,000.00
5	Variable manufacturing cost	156,000.00
6	Fixed manufacturing cost	288,000.00	1,824,000.00
7	Selling and administrative expenses:
8	Variable	$204,000.00
9	Fixed	96,000.00	300,000.00

Required:

1.

Prepare an income statement based on the absorption costing concept.*

2.

Prepare an income statement based on the variable costing concept.*

3.

Explain the reason for the difference in the amount of income from operations reported in (1) and (2).

* Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. Less, Plus or colons (:) will automatically appear if required. If a net loss is incurred, enter that amount as a negative number using a minus sign.

Labels Fixed costs For the Month Ended July 31, 2016 July 31, 2016

Amount Descriptions Contribution margin Contribution margin ratio Cost of goods manufactured Cost of goods sold Ending inventory Fixed manufacturing costs Fixed selling and administrative expenses Gross profit Income from operations Loss from operations Manufacturing margin Planned contribution margin Sales Sales mix Selling and administrative expenses Variable cost of goods manufactured Variable cost of goods sold Variable selling and administrative expenses

3) On June 30, the end of the first month of operations, Bastile Company prepared the following income statement, based on the absorption costing concept:

Bastile Company

Absorption Costing Income Statement

For the Month Ended June 30, 2016

1	Sales (23,000 units)		$3,450,000.00
2	Cost of goods sold:
3	Cost of goods manufactured (26,000 units)	$2,080,000.00
4	Less ending inventory (3,000 units)	240,000.00
5	Cost of goods sold		1,840,000.00
6	Gross Profit		$1,610,000.00
7	Selling and administrative expenses		170,000.00
8	Income from operations		$1,440,000.00

If the fixed manufacturing costs were $208,000 and the variable selling and administrative expenses were $115,000 prepare an income statement according to the variable costing concept. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. Less, Plus or colons (:) will automatically appear if required. If a net loss is incurred, enter that amount as a negative number using a minus sign.

Labels Fixed costs For the Month Ended June 30, 2016 June 30, 2016

Amount Descriptions Contribution margin Contribution margin ratio Ending inventory Fixed manufacturing costs Fixed selling and administrative expenses Gross profit Income from operations Loss from operations Manufacturing margin Planned contribution margin Sales Sales mix Variable cost of goods manufactured Variable cost of goods sold Variable selling and administrative expenses

4) Prior to the first month of operations ending July 31, 2016, Muzenski Industries Inc. estimated the following operating results:

1	Sales (28,800 $90)	2,592,000.00
2	Manufacturing costs (28,800 units):
3	Direct materials	1,209,600.00
4	Direct labor	230,400.00
5	Variable factory overhead	115,200.00
6	Fixed factory overhead	218,880.00
7	Fixed selling and administrative expenses	28,200.00
8	Variable selling and administrative expenses	35,300.00

The company is evaluating a proposal to manufacture 36,000 units instead of 28,800 units, thus creating an ending inventory of 7,200 units. Manufacturing the additional units will not change sales, unit variable factory overhead costs, total fixed factory overhead cost, or total selling and administrative expenses.

Required:

A.

Prepare an estimated income statement, comparing operating results if 28,800 and 36,000 units are manufactured in (1) the absorption costing format and (2) the variable costing format. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. Less, Plus or colons (:) will automatically appear if required.

B

What is the reason for the difference in income from operations reported for the two levels of production by the absorption costing income statement?

Labels Fixed costs For the Month Ended July 31, 2016 July 31, 2016

Amount Descriptions Contribution margin Contribution margin ratio Cost of goods manufactured Cost of goods sold Ending inventory Fixed factory overhead Fixed selling and administrative expenses Gross profit Income from operations Loss from operations Manufacturing margin Planned contribution margin Sales Sales mix Selling and administrative expenses Total fixed costs Variable cost of goods manufactured Variable cost of goods sold Variable selling and administrative expenses

5) Frigid Motors Inc. assembles and sells snowmobile engines. The company began operations on July 1, 2016, and operated at 100% of capacity during the first month. The following data summarize the results for July:

1	Sales (38,000 units)		$9,500,000.00
2	Production costs (46,500 units):
3	Direct materials	$4,650,000.00
4	Direct labor	1,860,000.00
5	Variable factory overhead	1,162,500.00
6	Fixed factory overhead	697,500.00	8,370,000.00
7	Selling and administrative expenses:
8	Variable selling and administrative expenses	$1,250,000.00
9	Fixed selling and administrative expenses	235,000.00	1,485,000.00

Required:

A.

Prepare an income statement according to the absorption costing concept.*

B.

Prepare an income statement according to the variable costing concept. A colon (:) will automatically appear if it is required.*

C.

What is the reason for the difference in the amount of income from operations reported in (A) and (B)?

* Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. Be sure to complete the statement heading. Enter all amounts as positive numbers. Labels Fixed costs For the Month Ended July 31, 2016 July 31, 2016 Amount Descriptions Contribution margin Contribution margin ratio Cost of goods sold Fixed factory overhead costs Fixed selling and administrative expenses Gross profit Income from operations Loss from operations Manufacturing margin Planned contribution margin Sales Sales mix Selling and administrative expenses Variable cost of goods sold Variable selling and administrative expenses