A company produces products type: A, B and C in three separate departments (production hall). Product lines crate segments in the company. Segment managers (segment A manager and segment B manager, segment C manager) are responsible for profitability of their departments. Asses the profitability of each segments (A, B and C) using variable costing method.

Additional information:

• Department A sales 1000 items of product A priced $23 each (including 100 items for department B).
• Variable costs of department B equals $14,000
• In the production process of type B product, product A is used as a semi-finished product.
• Variable costs of department A which are included as a cost of goods sold of product A equals $19,000
• Department B sells on average 110 items of B product, priced $ 400 per item.
• Sales revenues form product C equals $70,000
• Fixed costs of direct labour connected with segment (department) A – $2,000
• Variable cost of units sold of product C is $25,000
• Fixed cost of direct labour connected with segment (department) B – $10,000
• Fixed cost of employee salary connected with segment (department) C – $13,000
• Common fixed administrative expanses connected with board members salary $12,500. Only for internal porpoise they decided to assign this costs into segments using direct labor cost as a base.
• Fixed overhead costs for depreciation of machines used in department A equal $3,500; in department B equal $3,500 in department C equal $5,000.

Required:

1. Calculate the possible results for particular segments and for the whole company using segment income statement. (10 marks)
2. Should the company give up the production of one of the product? Should they withdraw one of three products from the market? Justify the answer. Consider that department B manager received an offer of semi-finished products purchase out of the company for $ 20 per item, necessary for the production of B products form external supplier. It is also established that fixed costs generated during production process of unprofitable product will be assign to the rest of the products produced in a proportion of 50 by 50 % (5 marks)
3. Comment usefulness of variable costing method (5 marks)

Answer rating: 100% (QA)

Segment Income Statement A B C Sales 23000 231000 44000 11044 70000 Less Variable Co... View the full answer