Question

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	$ 449,200
Variable cost of goods sold	144,200	195,600
Direct fixed overhead	24,600	49,200

A sales commission of 6% 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 $49,800 for the jacket line.

Common fixed overhead for the factory was estimated to be $47,900. Common selling and administrative expense was estimated to be $16,800.

1. Prepare a segmented income statement for Knitline for the coming year, using variable costing. Refer to the list of Labels and Amount Descriptions for the exact wording of text items within your income statement. If an amount is negative, first enter a minus sign (-).

Score: 82/159

Knitline Inc.

Segmented Income Statement

For the Coming Year

1		Sweaters	Jackets	Total
2	✔	✔	✔	✔
3	✔
4	✔
5	✔
6	✔
7	✔
8	✔
9	✔
10	✔
11	✔
12	✔
13	✔
14	✔

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 $9,170 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?

Complete the statements below that outline the impact of the overhead expense increase. If an amount is negative, first enter a minus sign (-).

•	For the company as a whole, operating income will decrease to   .
•	For the sweater line, the segment’s margin will be . In this case, if profitability is not expected to improve (either by increasing price or decreasing other costs), then the sweater   line(s) should be dropped.
•	For the jacket line, the segment’s margin will be . In this case, if profitability is not expected to improve (either by increasing price or decreasing other costs), then neither of the   line(s) should be dropped.

Answer 1

Solution 1
Kniteline Inc.
Segmented Income Statement for the coming Year
Particulars	Sweaters ($)	Jackets($)	Total($)
Sales	210500	449200	659700
(-) Variable Cost	-144200	-195600	-339800
(-) Sales Commission ( Note 1)	-12630	-26952	-39582
Contribution	53670	226648	280318
(-) Direct Fixed Overhead	-24600	-49200	-73800
(-) Direct Fixed Selling and Administrative Overhead	-20400	-49800	-70200
Contribution control	8670	127648	136318
(-) Common Fixed Overhead Factory Cost			-47900
(-) Common Seliing and administrative Overhead Cost			-16800
Net Profit Earned by Kniteline inc			71618
Solution 2
Case 1: when direct Fixed overhead cost increases by $9170 for Sweaters Segment
Kniteline Inc.
Segmented Income Statement for the coming Year
Particulars	Sweaters ($)	Jackets($)	Total($)
Sales	210500	449200	659700
(-) Variable Cost	-144200	-195600	-339800
(-) Sales Commission ( Note 1)	-12630	-26952	-39582
Contribution	53670	226648	280318
(-) Direct Fixed Overhead	-33770	-49200	-82970
(-) Direct Fixed Selling and Administrative Overhead	-20400	-49800	-70200
Contribution control	-500	127648	127148
(-) Common Fixed Overhead Factory Cost			-47900
(-) Common Seliing and administrative Overhead Cost			-16800
Net Profit Earned by Kniteline inc			62448
For the company as a whole, operating income will decrease to $62448
For the sweater line, the segment’s margin will be -$500. In this case, if profitability is not expected to improve (either by increasing price or decreasing other costs), then the sweater line(s) should be dropped.
Case 2: when direct Fixed overhead cost increases by $9170 for Sweaters Segment
Kniteline Inc.
Segmented Income Statement for the coming Year
Particulars	Sweaters ($)	Jackets($)	Total($)
Sales	210500	449200	659700
(-) Variable Cost	-144200	-195600	-339800
(-) Sales Commission ( Note 1)	-12630	-26952	-39582
Contribution	53670	226648	280318
(-) Direct Fixed Overhead	-24600	-58370	-82970
(-) Direct Fixed Selling and Administrative Overhead	29070	168278	197348
Contribution control	58140	336556	394696
(-) Common Fixed Overhead Factory Cost			-47900
(-) Common Seliing and administrative Overhead Cost			-16800
Net Profit Earned by Kniteline inc			329996
For the company as a whole, operating income will decrease to $329996
For the jacket line, the segment’s margin will be $329996. In this case, profitability is getting reduced due to increase in fixed cost. Hence, the company should look for other alternative to improve the profit. However, this segment is still delivering profit hence it should not be dropped.
	Sweaters ($)	Jackets($)	Total($)
Note 1: Sales Commission (6% on sales)	12630	26952	39582