Managerial Assignment 03

Amir Hassan Ibrahim
Accounting assignment
Ch-5-A1
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 labour 330
Supplies 25
Utilities—variable portion 42
Utilities— fixed portion 17
Indirect labor—variable portion 93
Indirect labor—fixed portion 51
Depreciation 215
Property taxes 18
Supervisory salaries 59
Selling expenses were $296,000 (including $76,000 that were variable)

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.
1. Prepare two income statements, one using the contribution approach and one using the absorption approach.
The absorption approach: -
Liberty Company
Absorption Income Statement
For the year, 2012
(In thousands of dollars)
Sales 2,500
Manufacturing cost of goods sold
Direct material used 410
Direct labor 330
Indirect manufacturing
Supplies 25
Total VOH 160
Property taxes 18
Depreciation 215
Total FOH 360
Total Indirect manufacturing 520
Total Manufacturing cost of goods sold 1,260
Gross margin or gross profit 1,240
Selling expenses 296
Administrative expenses 149
Total selling and administrative expenses 445
Operating income 795
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The Contribution approach: -
Liberty Company
Contribution Income Statement
For the year, 2012
Sales 2,500
Less: Variable expenses
Direct labor 330
Supplies 25
Total variable manufacturing cost of goods sold 160
variable Selling expenses 76
variable Administrative expenses 21
Total variable expenses 997
Contribution margin 1,503
Less: Fixed expenses
Property taxes 18
Depreciation 215
Total Manufacturing Fixed Overhead 360
Fixed Selling expenses 220
Fixed Administrative expenses 128
Total Fixed expenses 708
Operating income 795
2. 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?
Sales Percentage = 2300/2500 = 92%

New Contribution Margin = 1,503* 92% = 1382.76
Operating income = CM – Fixed costs = 1382.76 – 708 = 674.76
Variable costing shows profits after all the bills have been paid for the accounting period.
5-A2 Special Order

Consider the following details of the income statement of the McGregor Pen Company (MPC) for the year ended
December 31, 20X0:
Sales 15,900,000
Less cost of goods sold 9,450,000
Gross margin or gross profit 6,450,000
Less selling and administrative expenses 4,350,000
Operating income 2,100,000
MPC’s fixed manufacturing costs were $3.6 million and its fixed selling and administrative costs were $3.3 million.
Sales commissions of 3% of sales are included in selling and administrative expenses.
The division had produced and sold 3 million pens. Near the end of the year, Pizza Hut offered to buy 140,000 pens on a
special order. To fill the order, a special Pizza Hut logo would have to be added to each pen. Pizza Hut intended to use
the pens for special promotions in an eastern city during early 20X1.
C HAPTER 5
Even though MPC had some idle plant capacity, the president rejected the Pizza Hut offer of
$610,400 for the 140,000 pens. He said,
The Pizza Hut offer is too low. We’d avoid paying sales commissions, but we’d have to incur an extra cost of $.35 per pen to add the
logo. If MPC sells below its regular selling prices, it will begin a chain reaction of competitors’ price cutting and of customers wanting
special deals. I believe in pricing at no lower than 8% above our full costs of $13,800,000, 3,000,000 units = $4.60 per unit plus the
extra $.35 per pen less the savings in commissions.
1. using the contribution-margin technique, prepare an analysis similar to that in Exhibit 5-6 on page 187. Use four
columns: without the special order, the effect of the special order (one column total and one column per unit), and totals
with the special order.
Without With
Special Effect of Special Order Special
Order Order
3,000,
140,000 3,140,000
000
Units Total Per Unit
15,900,00 16,510,40
Sales
0 610,400 4.36 0
Less variable expenses:
-
Manufacturing 5,850,000 322,000 2.30 6,172,000
Selling & administrative 1,050,000 1,050,000
Total variable expenses 6,900,000 322,000 2.30 7,222,000
Contribution margin
9,000,000 288,400 2.06 9,288,400
Less fixed expenses:
-
Manufacturing 3,600,000 3,600,000
Selling & administrative 3,300,000 3,300,000
Total fixed expenses 6,900,000 6,900,000
Operating income 2,100,000 288,400 2.06 2,388,400
2. By what percentage would operating income increase or decrease if the order had been accepted?
Do you agree with the president’s decision? Why?
- Operating income will increase by 14%
- I disagree with the president’s decision
- Because as I have idle capacity acceptance of the order will contribute by $
288,400 to cover the fixed cost and the company will be better off accepting
the special order
5-31 Straightforward Absorption Statement
The Kerwin Company had the following data (in thousands) for a given period:
Sales 780
Direct materials 180
Direct labor 230
Indirect manufacturing costs 210
Selling and administrative expenses 130
* There were no beginning or ending inventories.
Kerwin Company
Absorption Income Statement
For the year, 20xx
Sales 780
Manufacturing cost of goods sold
Direct labor 230
Indirect manufacturing 210
Total Manufacturing cost of goods sold 620
Gross margin or gross profit 160
Selling and administrative expenses 130
Operating income 30
* Conversion cost (total manufacturing cost less materials cost) = 620-180= 440
5-32 Straightforward Contribution Income Statement

Masa, Ltd., had the following data (in millions of yen) for a given period:
Sales ¥990
Direct materials 250
Direct labor 140
Variable factory overhead 65
Variable selling and administrative expenses 115
Fixed factory overhead 110
Fixed selling and administrative expenses 75
* There were no beginning or ending inventories. Compute the
(a) Variable manufacturing cost of goods sold
(b) Contribution margin, and
(c) Operating income.
Kerwin Company
Contribution Income Statement
For the year, 20xx
(In thousands of yen)
Sales 990
Less: Variable expenses
Direct labor 140
Variable factory overhead 65
Variable selling and administrative 115
expenses
(a) Total variable expenses 570
(b) Contribution margin 420
Less: Fixed expenses
Fixed factory overhead 110
Fixed selling and administrative
expenses 75
Total Fixed expenses 185
(c) Operating income 235
5-33 Straightforward Absorption and Contribution Statement

Anzola Company had the following data (in millions) for a recent period. Fill in the blanks. There
were no beginning or ending inventories.
a. Sales 920
b. Direct materials used 350
c. Direct labor 210
Indirect manufacturing costs:
d. Variable 100
e. Fixed 50
f. Variable manufacturing cost of
—
goods sold 660
g. Manufacturing cost of goods sold — 710
Selling and administrative
expenses:
h. Variable 90
i. Fixed 80
j. Gross profit — 210
k. Contribution margin — 170
5-36 Special-Order Decision

Belltown Athletic Supply (BAS) makes game jerseys for athletic teams. The F. C. Kitsap soccer
club has offered to buy 100 jerseys for the teams in its league for $15 per jersey. The team price
for such jerseys normally is $18, an 80% mark up over BAS’s purchase price of $10 per jersey.
BAS adds a name and number to each jersey at a variable cost of $2 per jersey. The annual fixed
cost of equipment used in the printing process is $6,000, and other fixed costs allocated to
jerseys are $2,000. BAS makes about 2,000 jerseys per year, so the fixed cost is $4 per jersey.
The equipment is used only for printing jerseys and stands idle 75% of the usable time.
CHAPTER5
The manager of BAS turned down the offer, saying, “If we sell at $15 and our cost is $16, we
lose money on each jersey we sell. We would like to help your league, but we can’t afford to lose
money on the sale.”
1. Compute the amount by which the operating income of BAS would change if it
accepted F. C. Kitsap’s offer.
Without With
Special Effect of Special Order Special
Order Order
Units 2,000 100 2,100
Total Per Unit
Sales
36,000 1,500 15.00 37,500
Less variable expenses:
Manufacturing
24,000 1,200 12.00 25,200
Total variable expenses
24,000 1,200 12 25,200
Contribution margin
12,000 300 3.00 12,300
Less fixed expenses:
Manufacturing
6,000 6,000
Other Fixed costs
2,000 2,000
Total fixed expenses
8,000 8,000
Operating income
4,000 300 3.00 4,300
2. Suppose you were the manager of BAS. Would you accept the offer? In addition to
considering the quantitative impact computed in requirement 1, list two qualitative
considerations that would influence your decision—one qualitative factor
supporting acceptance of the offer and one supporting rejection.
- I would accept the offer

- one qualitative factor supporting acceptance is that the factory have
idle capacity about 75%
- one qualitative factor supporting rejection is the price could go down
as customers would know I can produce with such low price
Thanks
Amir Hassan
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Amir Hassan Ibrahim

Selling expenses were $296,000 (including $76,000 that were variable)

Sales Percentage = 2300/2500 = 92%

5-A2 Special Order

5-32 Straightforward Contribution Income Statement

5-33 Straightforward Absorption and Contribution Statement

5-36 Special-Order Decision

- I would accept the offer

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