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Variable and Absorption Costing

The following data were adapted from a recent income statement of Caterpillar Inc. $($CAT$)$ for the year ended December $31$:

Line Item Description $($in millions$)$

Sales $$41,748$

Cost of goods sold $$(29,082)$

Selling, administrative, and other expenses $(8,113)$

Total expenses $$(37,195)$

Operating income $$4,553$

Assume that $$10,575$ million of cost of goods sold and $$5,000$ million of selling, administrative, and other expenses were fixed costs. Inventories at the beginning and end of the year were as follows:

Line Item Description Amount

Beginning inventory $$11,266$

Ending inventory $11,402$

Also, assume that $30\%$ of the beginning and ending inventories were fixed costs.

Question Content Area

a$.$ Prepare an income statement according to the variable costing concept for Caterpillar Inc. Round numbers to nearest million.

Caterpillar Inc.

Variable Costing Income Statement $($assumed$)$

For the Year Ended December $31$

Line Item Description Amount Amount

Sales

$Sales

$41,748$

Variable cost of goods sold:

Beginning inventory $Beginning inventory

$7,886$

Variable cost of goods manufactured

Variable cost of goods manufactured

$-18,507$

Ending inventory

Ending inventory

$7,981$

Total variable cost of goods sold

Total variable cost of goods sold

$18,412$

Manufacturing margin

$Manufacturing margin

$23,336$

Variable selling and administrative expenses

Variable selling and administrative expenses

$3,113$

Contribution margin

$Contribution margin

$20,223$

Fixed costs:

Fixed manufacturing costs

$Fixed manufacturing costs

$10,575$

Fixed selling and administrative expenses

Fixed selling and administrative expenses

$5,000$

Total fixed costs

Total fixed costs

$15,575$

Operating income

$Operating income

$4,648$