Norma Richardson, manager of a division specialiazing in concrete pipe and concrete blocks, has just been rebuffed by Eric Hipple, president of the company. Eric had called a meeting of all divisional managers to discuss the downturn in business the company had been experiencing during the past two years. Eric has come down hard on managers, pointing out that their jobs would be on the line if some immediate improvements were not forthcoming. Norma, acting as spokesperson for the divisional managers, has tried to explain to Eric why revenues and profits were declining. In the divisional manager’s view, business was suffering because residential and commercial construction was down. With the slump in the construction business, competition had intensified. Norma indicated that her division has lost several bids to competitors who were bidding below the full cost of the product. Since company policy prohibited divisional managers from accepting any jobs below full cost, these bids were lost. Norma, on behalf of the managers, requested a change in the company policy concerning bids. She proposed that he floor bids be changed to variable cost rather than full cost. In times of economic distress, bids that cover at least their variable costs would make a positive contribution toward covering fixed costs and would help maintain the divisions’ profits. Norma also proposed that divisional income statements be changed to a variable-costing basis so that a better picture of divisional performance would be available. Additionally, income statements for individual products, organized on a variable-costing basis, would provide better information concerning product performance and would facilitate bidding. 24 Upon hearing the request, Eric Hipple flatly turned it down. Eric was convinced that all costs must be covered or the company would go under. “It’s impossible to sell a product for less than what it costs and stay in business. Those companies that do so will be the first ones to go bankrupt. Also, I want to see the income produced by your divisions when all costs are considered – not just variable costs. I don’t believe in variable costing. If any of you can prove to me that variable costing is a better approach, then I will consider changing.” Upon returning home, Norma decided to prepare more formal arguments to convince Eric of the value of variable costing. To help in building her case, she had the divisional controller supply the following information concerning the concrete block line (80 x 80 x 160 blocks): Last quarter’s production (and sales) 100,000 Productivity capacity 140,000 Unit manufacturing cost: Direct materials $0.22 Direct labor 0.14 Variable overhead 0.09 Fixed overhead* 0.10 Total $0.55 *Based on the productive capacity of 140,000 units. Nonmanufacturing costs: Selling costs: Fixed $10,000 Variable 5% of sales Administrative (all fixed) $20,000 Total fixed overhead costs were $14,0000 (budgeted and actual). Variable overhead was incurred as expected. Overhead variances are closed to the Cost of Goods Sold. The average selling price for the 100,000 units sold was $0.90.

REQUIRED:

1. Prepare absorption-costing and variable-costing income statements for the last quarter’s results. Will this information help Norma in building her case?

Answer rating: 100% (QA)

Income Statement based on Absorption Costing Sales 90000 Less Cost of Goods Sold 5... View the full answer