Question 1 SEGMENTED INCOME STATEMENTS, PRODUCT-LINE ANALYSIS (LO2) Walker Compa
ID: 2521202 • Letter: Q
Question
Question 1
SEGMENTED INCOME STATEMENTS, PRODUCT-LINE ANALYSIS (LO2)
Walker Company produces blenders and coffeemakers. During the past year, the company produced and sold 100,000 blenders and 25,000 coffeemakers. Fixed costs for Walker totalled $250,000, of which $90,000 can be avoided if the blenders are not produced and $45,000 can be avoided if the coffee makers are not produced. Revenue and variable cost information follow:
Blenders Coffeemakers
Variable expenses per appliance $20 $43
Selling price per appliance 22 45
Required:
A )Prepare segmented income statements. Separate direct and common fixed costs.
B )What would the effect be on Walker's profit if the coffeemaker line is dropped? The blender line?
C) What would the effect be on firm profits if an additional 10,000 blenders could be produced (using existing capacity) and sold for $20.50 on a special-order basis? Existing sales would be unaffected by the special order.
Explanation / Answer
Walker Company
Blenders
Coffeemakers
Total
Sales Revenue
$2,200,000
$1,125,000
$3,325,000
Variable expenses
$2,000,000
$1,075,000
$3,075,000
Contribution margin
$200,000
$50,000
$250,000
Direct traceable expenses
$90,000
$45,000
135,000
Segment Margin
$110,000
$5,000
$115,000
Common fixed costs
$115,000
Operating income
$0
Sales = 100,000 x $22 = $2,200,000
Variable cost = 100,000 x $20 = $200,000
Avoidable fixed cost = direct traceable costs = $90,000
Sales = 25,000 x$45 = $1,125,000
Variable cost = 25,000 x $43 = $1,075,000
Avoidable fixed cost = direct traceable costs = $45,000
Coffeemaker line is dropped:
If coffeemaker line is dropped the segment margin of $5,000 will be lost and the overall profits of the company will decrease by $5,000.
The common fixed costs burden would be borne by Blenders resulting in a loss of $5,000 to the company.
Blenders line is dropped:
If blenders line is dropped the segment margin of $110,000 will be lost and the overall profits of the company will decrease by $110,000. The common fixed costs remain unabsorbed resulting in a loss of $110,000 to the company.
Less: incremental costs – variable costs = 10,000 x $20 = $200,000
Increase in net income = $5,000
Blenders
Coffeemakers
Total
Sales Revenue
$2,200,000
$1,125,000
$3,325,000
Variable expenses
$2,000,000
$1,075,000
$3,075,000
Contribution margin
$200,000
$50,000
$250,000
Direct traceable expenses
$90,000
$45,000
135,000
Segment Margin
$110,000
$5,000
$115,000
Common fixed costs
$115,000
Operating income
$0
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