Question 1

Wingate Company, a wholesale distributor of electronic equipment, has been experiencing losses for some time, as shown by its most recent monthly contribution format income statement:

Sales	$ 1,622,000
Variable expenses	700,140
Contribution margin	921,860
Fixed expenses	1,014,000
Net operating income (loss)	$ (92,140)

In an effort to resolve the problem, the company would like to prepare an income statement segmented by division. Accordingly, the Accounting Department has developed the following information:

	Division
	East	Central	West
Sales	$ 432,000	$ 640,000	$ 550,000
Variable expenses as a percentage of sales	47%	39%	45%
Traceable fixed expenses	$ 296,000	$ 331,000	$ 199,000

Required:

1. Prepare a contribution format income statement segmented by divisions.

2-a. The Marketing Department has proposed increasing the West Division's monthly advertising by $22,000 based on the belief that it would increase that division's sales by 19%. Assuming these estimates are accurate, how much would the company's net operating income increase (decrease) if the proposal is implemented?

2-b. Would you recommend the increased advertising?

Question 2

Whitman Company has just completed its first year of operations. The companys absorption costing income statement for the year follows:

Whitman Company Income Statement
Sales (42,000 units $44.60 per unit)	$ 1,873,200
Cost of goods sold (42,000 units $25 per unit)	1,050,000
Gross margin	823,200
Selling and administrative expenses	525,000
Net operating income	$ 298,200

The companys selling and administrative expenses consist of $315,000 per year in fixed expenses and $5 per unit sold in variable expenses. The $25 unit product cost given above is computed as follows:

Direct materials	$ 11
Direct labor	4
Variable manufacturing overhead	4
Fixed manufacturing overhead ($306,000 51,000 units)	6
Absorption costing unit product cost	$ 25

Required:

1. Redo the companys income statement in the contribution format using variable costing.

2. Reconcile any difference between the net operating income on your variable costing income statement and the net operating income on the absorption costing income statement above.

Question 3

Chuck Wagon Grills, Incorporated, makes a single producta handmade specialty barbecue grill that it sells for $210. Data for last years operations follow:

Units in beginning inventory	0
Units produced	20,400
Units sold	19,200
Units in ending inventory	1,200
Variable costs per unit:
Direct materials	$ 50
Direct labor	80
Variable manufacturing overhead	20
Variable selling and administrative	10
Total variable cost per unit	$ 160
Fixed costs:
Fixed manufacturing overhead	$ 714,000
Fixed selling and administrative	288,000
Total fixed costs	$ 1,002,000

Exercise 6-14 (Algo) Variable Costing Unit Product Cost and Income Statement; Break-Even Analysis [LO61, LO62]

Required:

1. Assume that the company uses variable costing. Compute the unit product cost for one barbecue grill.

2. Assume that the company uses variable costing. Prepare a contribution format income statement for last year.

3. What is the companys break-even point in terms of the number of barbecue grills sold?

Question 4

High Country, Incorporated, produces and sells many recreational products. The company has just opened a new plant to produce a folding camp cot that will be marketed throughout the United States. The following cost and revenue data relate to May, the first month of the plants operation:

Beginning inventory	0
Units produced	40,000
Units sold	35,000
Selling price per unit	$ 82
Selling and administrative expenses:
Variable per unit	$ 2
Fixed (per month)	$ 566,000
Manufacturing costs:
Direct materials cost per unit	$ 14
Direct labor cost per unit	$ 9
Variable manufacturing overhead cost per unit	$ 3
Fixed manufacturing overhead cost (per month)	$ 720,000

Management is anxious to assess the profitability of the new camp cot during the month of May.

Required:

1. Assume that the company uses absorption costing.

a. Calculate the unit product cost.

b. Prepare an income statement for May.

2. Assume that the company uses variable costing.

a. Calculate the unit product cost.

b. Prepare a contribution format income statement for May.