Questions: Knitline Inc. produces high-end sweaters and jackets in a single factory. The following information was provided for the coming year. Sweaters Jackets Sales 210,500 451,400 Variable cost of goods sold 144,200 196,500 Direct fixed overhead 24,700 48,400 A sales commission of 4% of sales is paid for each of the two product lines. Direct fixed selling and administrative expense was estimated to be 20,400 for the sweater line and 49,500 for the jacket line. Common fixed overhead for the factory was estimated to be 46,000. Common selling and administrative expense was estimated to be 13,400. Required: 1. Prepare a segmented income statement for Knitline for the coming year, using variable costing. 2. Suppose that next year, all revenues and costs are expected to remain the same except for direct fixed overhead expense, which will go up by 13,280 for one of the product lines due to costs related to new equipment. Does it matter which line (sweaters or jackets) requires the new equipment? Why?

Knitline Inc. produces high-end sweaters and jackets in a single factory. The following information was provided for the coming year. Sweaters Jackets Sales 210,500 451,400 Variable cost of goods sold 144,200 196,500 Direct fixed overhead 24,700 48,400 A sales commission of 4% of sales is paid for each of the two product lines. Direct fixed selling and administrative expense was estimated to be 20,400 for the sweater line and 49,500 for the jacket line. Common fixed overhead for the factory was estimated to be 46,000. Common selling and administrative expense was estimated to be 13,400. Required: 1. Prepare a segmented income statement for Knitline for the coming year, using variable costing. 2. Suppose that next year, all revenues and costs are expected to remain the same except for direct fixed overhead expense, which will go up by 13,280 for one of the product lines due to costs related to new equipment. Does it matter which line (sweaters or jackets) requires the new equipment? Why?
Transcript text: Knitline Inc. produces high-end sweaters and jackets in a single factory. The following information was provided for the coming year. \begin{tabular}{lcc} & Sweaters & Jackets \\ \hline Sales & $\$ 210,500$ & $\$ 451,400$ \\ Variable cost of goods sold & 144,200 & 196,500 \\ Direct fixed overhead & 24,700 & 48,400 \end{tabular} A sales commission of $4 \%$ of sales is paid for each of the two product lines. Direct fixed selling and administrative expense was estimated to be $\$ 20,400$ for the sweater line and $\$ 49,500$ for the jacket line. Common fixed overhead for the factory was estimated to be $\$ 46,000$. Common selling and administrative expense was estimated to be $\$ 13,400$. Required: 1. Prepare a segmented income statement for Knitline for the coming year, using variable costing. 2. Suppose that next year, all revenues and costs are expected to remain the same except for direct fixed overhead expense, which will go up by $\$ 13,280$ for one of the product lines due to costs related to new equipment. Does it matter which line (sweaters or jackets) requires the new equipment? Why?
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Solution

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Solution Steps

Step 1: Prepare the Segmented Income Statement

To prepare the segmented income statement for Knitline Inc., we calculate the following for each product line (sweaters and jackets):

  1. Sales:

    • Sweaters: \( \$210,500 \)
    • Jackets: \( \$451,400 \)

  2. Variable Cost of Goods Sold:

    • Sweaters: \( \$144,200 \)
    • Jackets: \( \$196,500 \)

  3. Contribution Margin: \[ \text{Contribution Margin} = \text{Sales} - \text{Variable Cost of Goods Sold} \]

    • Sweaters: \( 210500 - 144200 = 66300 \)
    • Jackets: \( 451400 - 196500 = 254900 \)

  4. Sales Commission (4% of Sales): \[ \text{Sales Commission} = 0.04 \times \text{Sales} \]

    • Sweaters: \( 0.04 \times 210500 = 8420 \)
    • Jackets: \( 0.04 \times 451400 = 18056 \)

  5. Segment Margin: \[ \text{Segment Margin} = \text{Contribution Margin} - \text{Sales Commission} - \text{Direct Fixed Overhead} - \text{Direct Fixed Selling and Administrative Expense} \]

    • Sweaters: \[ 66300 - 8420 - 24700 - 20400 = 12780 \]
    • Jackets: \[ 254900 - 18056 - 48400 - 49500 = 138944 \]

  6. Total Segment Margin: \[ \text{Total Segment Margin} = 12780 + 138944 = 151724 \]

  7. Common Fixed Overhead: \( \$46,000 \)

  8. Common Selling and Administrative Expense: \( \$13,400 \)

  9. Net Operating Income: \[ \text{Net Operating Income} = \text{Total Segment Margin} - \text{Common Fixed Overhead} - \text{Common Selling and Administrative Expense} \] \[ 151724 - 46000 - 13400 = 92324 \]

Step 2: Analyze the Impact of Increased Direct Fixed Overhead

Next, we analyze the impact of an increase in direct fixed overhead by \( \$13,280 \) for either product line.

  1. New Segment Margin if Sweaters incur the additional expense: \[ \text{New Segment Margin (Sweaters)} = 12780 - 13280 = -500 \]

  2. New Segment Margin if Jackets incur the additional expense: \[ \text{New Segment Margin (Jackets)} = 138944 - 13280 = 125664 \]

  3. New Total Segment Margin if Sweaters incur the additional expense: \[ \text{New Total Segment Margin (Sweaters)} = -500 + 138944 = 138444 \]

  4. New Total Segment Margin if Jackets incur the additional expense: \[ \text{New Total Segment Margin (Jackets)} = 12780 + 125664 = 138444 \]

  5. New Net Operating Income if Sweaters incur the additional expense: \[ \text{New Net Operating Income (Sweaters)} = 138444 - 46000 - 13400 = 79044 \]

  6. New Net Operating Income if Jackets incur the additional expense: \[ \text{New Net Operating Income (Jackets)} = 138444 - 46000 - 13400 = 79044 \]

Final Answer

The segmented income statement shows a net operating income of \( \$92,324 \). If the direct fixed overhead increases by \( \$13,280 \), it does not matter which product line incurs the additional expense, as the new net operating income remains the same at \( \$79,044 \) for both scenarios.

\[ \boxed{\text{Net Operating Income: } 92324, \text{ New Net Operating Income: } 79044} \]

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