Question 1:

Income Statements under Absorption Costing and Variable Costing

Joplin Industries Inc. manufactures and sells high-quality sporting goods equipment under its highly recognizable J-Sports logo. The company began operations on May 1 and operated at 100% of capacity (270,000 units) during the first month, creating an ending inventory of 24,000 units. During June, the company produced 246,000 garments during the month but sold 270,000 units at $300 per unit. The June manufacturing costs and selling and administrative expenses were as follows:

	Number of Units	Unit Cost	Total Cost
Manufacturing costs in June 1 beginning inventory:
Variable	24,000		$150.00		$ 3,600,000
Fixed	24,000		32.80		787,200
Total		$182.80		$4,387,200
Manufacturing costs in June:
Variable	246,000		$150.00		$36,900,000
Fixed	246,000		36.00		8,856,000
Total		$186.00		$45,756,000
Selling and administrative expenses in June:
Variable	270,000		$ 45.00		$12,150,000
Fixed	270,000		3.60		972,000
Total		$ 48.60		$13,122,000

Question Content Area

a. An income statement according to the absorption costing concept for June.

Question Content Area

b. Prepare an income statement according to the variable costing concept for June.

Contribution marginFixed selling and administrative expensesManufacturing marginSalesVariable selling and administrative expenses		$- Select -
Contribution marginFixed manufacturing costsManufacturing marginVariable cost of goods soldVariable selling and administrative expenses		- Select -
Contribution marginFixed manufacturing costsFixed selling and administrative expensesManufacturing marginSalesVariable selling and administrative expenses		$- Select -
Fixed manufacturing costsFixed selling and administrative expensesManufacturing marginVariable cost of goods soldVariable selling and administrative expenses		- Select -
Contribution marginFixed manufacturing costsManufacturing marginVariable cost of goods soldVariable selling and administrative expenses		$- Select -
Fixed costs:
Contribution marginFixed manufacturing costsSalesVariable cost of goods soldVariable selling and administrative expenses	$- Select -
Contribution marginFixed selling and administrative expensesSalesVariable cost of goods soldVariable selling and administrative expenses	- Select -
Contribution marginIncome from operationsManufacturing marginSalesTotal fixed costs		- Select -
Income from operationsLoss from operations		$- Select -

Question Content Area

c. What is the reason for the difference in the amount of income from operations reported in (a) and (b)?

Under the

absorption costingvariable costing

method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under

absorption costingvariable costing

, all of the fixed manufacturing cost is deducted in the period in which it is incurred, regardless of the amount of inventory change. Thus, when inventory decreases, the

absorption costingvariable costing

income statement will have a lower income from operations.

Question 2:

Cost of Goods Manufactured, using Variable Costing and Absorption Costing

On December 31, the end of the first year of operations, Frankenreiter Inc. manufactured 25,600 units and sold 24,000 units. The following income statement was prepared, based on the variable costing concept:

Frankenreiter Inc. Variable Costing Income Statement For the Year Ended December 31, 20Y1
Sales		$9,600,000
Variable cost of goods sold:
Variable cost of goods manufactured	$5,376,000
Inventory, December 31	(336,000)
Total variable cost of goods sold		5,040,000
Manufacturing margin		$4,560,000
Total variable selling and administrative expenses		1,150,000
Contribution margin		$3,410,000
Fixed costs:
Fixed manufacturing costs	$1,664,000
Fixed selling and administrative expenses	890,000
Total fixed costs			2,554,000
Income from operations		$ 856,000

Determine the unit cost of goods manufactured, based on (a) the variable costing concept and (b) the absorption costing concept.

Variable costing	$fill in the blank 1
Absorption costing	$fill in the blank 2

Question 3:

Segment Contribution Margin Analysis

The operating revenues of the three largest business segments for Time Warner, Inc., for a recent year follow. Each segment includes a number of businesses, examples of which are indicated in parentheses.

Time Warner, Inc. Segment Revenues (in millions)
Turner (cable networks and digital media)	$10,596
Home Box Office (pay television)	5,615
Warner Bros. (films, television, and videos)	12,993

Assume that the variable costs as a percent of sales for each segment are as follows:

Turner	40%
Home Box Office	35%
Warner Bros.	25%

a. Determine the contribution margin and contribution margin ratio. Enter amounts in millions. When required, round to the nearest whole millionth (for example, round 5,688.7 to 5,689). Round contribution margin ratio to the nearest whole percent for each segment from the information given. Enter all amounts as positive numbers.

	Turner	Home Box Office	Warner Bros.
Revenues	$fill in the blank 1		$fill in the blank 2		$fill in the blank 3
Variable costs	fill in the blank 4		fill in the blank 5		fill in the blank 6
Contribution margin	$fill in the blank 7		$fill in the blank 8		$fill in the blank 9
Contribution margin ratio (as a percent)	fill in the blank 10	%	fill in the blank 11	%	fill in the blank 12	%

b. Does your answer to (b) mean that the other segments are more profitable businesses?

The higher contribution margin ratio of a segment should not be interpreted as being the

leastmost

profitable segment. If the volume of business is not sufficient to exceed the break-even point, then the segments would be

somewhat profitableunprofitable

. In the final analysis, the fixed costs also should be considered in determining the overall profitability of the segments. The

contribution margin ratiofixed costsvariable costs

shows how sensitive the profit will be to changes in volume.