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5-A1 Straightforward Income Statements The Liberty Company had the following manufacturing data for the year 2012 (in thousands of dollars): Beginning and ending inventories None

5-A1 Straightforward Income Statements

The Liberty Company had the following manufacturing data for the year 2012 (in thousands of dollars):

Beginning and ending inventories

None

Direct material used

$410

Direct labor

330

Supplies

25

Utilitiesvariable portion

42

Utilitiesfixed portion

17

Indirect laborvariable portion

93

Indirect laborfixed portion

51

Depreciation

215

Property taxes

18

Supervisory salaries

59

Selling expenses were $296,000 (including $76,000 that were variable) and general administrative expenses were $149,000 (including $21,000 that were variable). Sales were $2.5 million.

Direct labor and supplies are regarded as variable costs.

Prepare two income statements, one using the contribution approach and one using the absorption approach.

Suppose that all variable costs fluctuate directly in proportion to sales and that fixed costs are unaffected over a very wide range of sales. What would operating income have been if sales had been $2.3 million instead of $2.5 million? Which income statement did you use to help obtain your answer? Why?

5-A4 Target Costing

Dans Discount Corporation uses target costing to aid in the final decision to release new products to production. A new product is being evaluated. Market research has surveyed the potential market for this product and believes that its unique features will generate a total demand over the products life of 65,000 units at an average price of $380. The target costing team has members from market research, design, accounting, and production engineering departments. The team has worked closely with key customers and suppliers. A value analysis of the product has determined that the total cost for the various value-chain functions using the existing process technology are as follows:

Value-Chain Function

Total Cost over Product Life

Research and development

$ 2,100,000

Design

250,000

Manufacturing (40% outsourced to suppliers)

5,000,000

Marketing

1,400,000

Distribution

1,500,000

Customer service

3,070,000

Total cost over product life

$13,320,000

Management has a target contribution to profit percentage of 50% of sales. This contribution provides sufficient funds to cover corporate support costs, taxes, and a reasonable profit.

Should the new product be released to production? Explain.

Approximately 40% of manufacturing costs for this product consists of materials and parts that are purchased from suppliers. Key suppliers on the target-costing team have suggested process improvements that will reduce supplier cost by 15%. Should the new product be released to production? Explain.

New process technology can be purchased at a cost of $220,000 that will reduce non-outsourced manufacturing costs by 30%. Assuming the suppliers process improvements and new process technology are implemented, should the new product be released to production? Explain.

5-B1 Contribution and Absorption Income Statements

The following information is taken from the records of the Zealand Manufacturing Company for the year ending December 31, 2012. There were no beginning or ending inventories.

Sales

$14,000,000

Long-term rent, factory

$ 85,000

Sales commissions

470,000

Advertising

430,000

Factory superintendents salary

31,000

Shipping expenses

320,000

Factory supervisors salaries

105,000

Direct materials used

3,500,000

Administrative executive salaries

100,000

Direct labor

1,700,000

Cutting bits used

53,000

Administrative clerical salaries (variable)

370,000

Factory methods research

42,000

Abrasives for machining

99,000

Fire insurance on factory equipment

4,000

Indirect labor

950,000

Property taxes on factory equipment

26,000

Depreciation on factory equipment

430,000

1. Prepare a contribution income statement and an absorption income statement. If you are in doubt about any cost behavior pattern, decide on the basis of whether the total cost in question will fluctuate substantially over a wide range of volume. Prepare a separate supporting schedule of indirect manufacturing costs subdivided between variable and fixed costs.

2. Suppose that all variable costs fluctuate directly in proportion to sales, and that fixed costs are unaffected over a wide range of sales. What would operating income have been if sales had been $12 million instead of $14 million? Which income statement did you use to help get your answer? Why?

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