EXERCISE 2–3Constructing an Income Statement [LO3]

Home Entertainment, a retailer of CDs and DVDs, provided the

following information for the month of June:

Required:
Prepare an income statement for the company for the month.
Check Figure
Goods available for sale—$102,000; Gross margin—$70,000;
Operating income—$5,000.
Solution
EXERCISE 2–4Prepare a Schedule of Cost of Goods
Manufactured [LO4]
Classic Sound is a start-up company that produces vinyl records for
numerous record labels worldwide. The company has two full-time
employees working in the production department while the CEO
splits her time 80/20% between developing new business and
overseeing the production process. Information taken from the
accounting records for the first three months of operations is shown
below.

Required:
1. Prepare a schedule of cost of goods manufactured for the
company for the month.
2. What types of expenses are likely included in the total
manufacturing overhead cost of $30,000 incurred for the first
three months of operation?
Ex 2-4 Solution
PROBLEM 3–14High–Low Method; Scattergraph Analysis [LO2]
Travis Metals heats copper ingots to a high temperature by placing them in a
large oven. The heated ingots are then run through a shaping machine that
forms them into wire. Due to the length of time it takes the oven to heat up, it is never
turned off. When the ingots are placed in the oven the temperature is
raised to a higher level. Once they are done being heated the oven temperature is
turned back down until a new batch of ingots is ready to be
heated. The following information shows the ingots processed and the power
costs over the past 10 months.

Required:
1. Using Microsoft Excel, prepare a scattergraph by plotting ingots
processed and power costs on a graph. Use the Add Trendline feature in
Excel to plot a line through the points of the graph. Do power costs appear
to be related to the number of ingots processed in a month? Explain.
2. Using the high–low method, estimate a cost formula for power costs.
Express the formula in the form Y = a + bX.
3. Predict total power costs in a month when 140 ingots are processed.
Solution P 3-14
EXERCISE 3–4Contribution Format Income Statement [LO3]
Crazy Canucks is a small, family-owned retailer specializing in alpine
ski and snowboard equipment located in Squamish, B.C. An income
statement for the ski department’s most recent month is shown
below.

Skis sell, on average, for $1,500 per pair. Variable selling expenses
are $150 per pair of skis sold. The remaining selling expenses are
fixed. The administrative expenses are 20% variable and 80% fixed.
The company purchases its skis from several suppliers at an
average cost of $900 per pair.
Required:
1. Prepare an income statement for the month using the
contribution approach.
2. For every pair of skis sold during January, what was the
contribution toward covering fixed expenses and toward earning
profits?
3. What would the total contribution margin be in a month where
150 pairs of skis were sold? Do not prepare a new contribution
format income statement to determine your answer.

Solution Ex 3.4
1.

Crazy Canucks

Income Statement

Month ended Jan 31, 2023

Sales (200 units * $1,500) $300,000

Variable costs 214,000

Contribution Margin $86,000

Fixed costs $46,000

Operating income $40,000

Calculations

Variable costs : Cost of skis sold (per pair) $900, so 200 units * $900 = $180,000

$150 variable selling expenses per set of skis times 200 skis sold = $30,000

20% of administrative costs are variable so $20,000 * 20% = $4,000

Total variable costs $214,000

Fixed Costs: Selling expenses $60,000 - $30,000 = $30,000

Administrative expenses $20,000 * 80% = 16,000

Total fixed costs = $46,000

2.

Total skis sold is 200 units, total variable costs, $214,000, variable cost per unit, $214,000/200 =
$1,070.

Contribution margin per unit = selling price minus VC per unit, $1,500 - $1,070 = $430

3.

150 pairs of skis sold * contribution margin per unit of $430 = $64,500 total CM