Question

Kimbrell Inc. manufactures three sizes of utility tables—small (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, 20Y8, is as follows:

	Size
	S		M		L		Total
Sales	$990,000		$1,087,500		$945,000		$3,022,500
Cost of goods sold:
Variable costs	$538,500		$718,500		$567,000		$1,824,000
Fixed costs	241,000		288,000		250,000		779,000
Total cost of goods sold	$779,500		$1,006,500		$817,000		$2,603,000
Gross profit	$210,500		$81,000		$128,000		$419,500
Operating expenses:
Variable expenses	$118,100		$108,750		$85,050		$311,900
Fixed expenses	32,125		42,525		14,250		88,900
Total operating expenses	$150,225		$151,275		$99,300		$400,800
Income from operations	$60,275		$(70,275)		$28,700		$18,700

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. Enter all amounts as positive numbers.

Kimbrell Inc.
Variable Costing Income Statement
For the Year Ended December 31, 20Y8
	Size S	Size M	Size L	Total
Sales	$	$	$	$
Variable cost of goods sold
Manufacturing margin	$	$	$	$
Variable operating expenses
Contribution margin	$	$	$	$
Fixed costs:
Manufacturing costs				$
Operating expenses
Total fixed costs				$
Income from operations				$

2. Based on the income statement prepared in (1) and the other data presented above, 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 manager’s salary can be added to the fixed operating expenses. Enter all amounts as positive numbers.

Kimbrell Inc.
Variable Costing Income Statement
For the Year Ended December 31, 20Y8
	Size S	Size L	Total
Sales	$	$	$
Variable cost of goods sold
Manufacturing margin	$	$	$
Variable operating expenses
Contribution margin	$	$	$
Fixed costs:
Manufacturing costs			$
Operating expenses
Total fixed costs			$
Income from operations			$

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

Answer 1

1. Income Statement

KIMBRELL, INCC.

Variable Costing Income Statement

For the year ended 31^st January, 2016

Particular	Size			Total
	S	M	L
Sales	990000	1087500	945000	3022500
Variable cost of goods sold	538500	718500	567000	1824000
Manufacturing Margin	451500	369000	378000	1198500
Variable Operating Exp,	118100	108750	85050	311900
Contribution margin	333400	260250	292950	886600
Fixed Costs
Manufacturing Cost				779000
Operating expenses				88900
Total Fixed Cost				867900
Income from Operation				18700

2. If proposal 2 is accepted

Contribution margin of M		260250
Less: reduction in fixed costs	142500
Less: Reduction in fixed operating expenses	28350	170850
Reduction in annual income from operation		89400

3.

Increase in sale volume of Size S by additional 130%

Sale value

990000*130/100 = 1287000     then 990000+1287000 = 2277000

Variable cost

538500*130/100 = 700050 then 538500+700050 = 1238550

Variable expenses

118100*130/100 = 153530    then 118100+153530 = 271630

It is not mentioned in the question that whether the variable cost for Size S relatively increase or not. We assume that the cost of Size S is also increased by 130%.

If cost of Size M is added to Size S then relatively change the figure of Variable cost and Variable Expenses.

Particular	Size		Total
	S	L
Sales	2277000	945000	3222000
Variable cost of goods sold	1238550	567000	1805550
Manufacturing Margin	1038450	378000	1416450
Variable Operating Exp,	271630	85050	356680
Contribution margin	766820	292950	1059770
Fixed Costs
Manufacturing Cost			779000
Operating expenses (including additional salary)			173950
Total Fixed Cost			952950
Income from Operation			106820

4. proposal 3 is accepted

Income from operation, proposal 3	106820
Income from operation, present condition (part 1)	18700
Increase in income from operation	88120