When XYZ management met to review the year-end financial
statements, the room was filled with excitement. Sales had been
exceptional during the year and every department had exceeded the
budget and last year’s sales totals. Several years ago Waterways
had implemented a bonus system based on percentage of sales over
budget, and the managers were expecting healthy cheques at the end
of the year.
Yet the plant manager, Ryan Smith, was stunned into silence when he
read the bottom line on the income statement for manufacturing
operations. It was showing a loss! He immediately approached the
CFO asking for an explanation. Ryan wondered, “Why did we go
through all that trouble and inconvenience to adopt those
cost-cutting measures when they had the opposite effect?” One of
those measures was to move toward lean manufacturing.
The CFO retrieved the following information with respect to the
top-selling line from the manufacturing operations for the last
three years. Production on this line began on January 1,
2014:
2014 | 2015 | 2016 | ||||
Beginning inventory of finished units | 0 | |||||
Production in units | 60,000 | 76,000 | 45,600 | |||
Sales in units | 53,000 | 66,000 | 62,600 | |||
Selling price | $40 | $40 | $42 | |||
Direct material | $4 | $4 | $5 | |||
Direct labour | 5 | 5 | 6 | |||
Variable manufacturing overhead | 5 | 5 | 5 | |||
Variable selling and administration | 6 | 6 | 6 | |||
Fixed manufacturing overhead | 456,000 | 456,000 | 456,000 | |||
Fixed selling and administration | 140,000 | 140,000 | 140,000 |
Waterways uses the absorption-costing method and accounts for
inventory using FIFO.
Using the information provided, prepare condensed, three-year comparative income statements using the variable-costing method.
XYZ | |||
Year | 2014 | 2015 | 2016 |
Sales in units | 53000 | 66000 | 62600 |
Selling price $ | 40 | 40 | 42 |
Sales | 2120000 | 2640000 | 2629200 |
Costs | |||
Direct material per unit | 4 | 4 | 5 |
Material costs | 212000 | 264000 | 313000 |
Direct labour per unit | 5 | 5 | 6 |
Direct labour costs | 265000 | 330000 | 375600 |
Variable manufacturing overhead/unit | 5 | 5 | 5 |
Variable manufacturing overhead | 265000 | 330000 | 375600 |
Variable selling costs per unit | 6 | 6 | 6 |
Variable selling costs | 318000 | 396000 | 375600 |
Total variable costs | 1060000 | 1320000 | 1439800 |
Contribution margin | 1060000 | 1320000 | 1189400 |
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