Conversion of divisional to contribution margin income statement

Jokkmok Industries
Mr.
Rosen is the manager of a division of Jokkmok Industries. He is one of several
managers being considered for the position of CEO, as the current CEO is
retiring in a year.
All
divisions use standard absorption costing. The division has the capacity to
produce 50,000 units a quarter and quarterly fixed overhead amounts to
$700,000. Mr. Rosen has been looking at the report for the first three months
of the year and is not happy with the results.
Division Income Statement
For the Quarter Ending June 30, 2013

Production:
25,000 units

Sales
(25,000 units)

$2,500,000

Cost
of goods sold

1,800,000

———–

Gross
profit

700,000

Selling
& general expenses

350,000

Net
income

$350,000

The
sales forecast for the second quarter is 25,000 units. Mr. Rosen had budgeted
second quarter production at 25,000 units but changes it to 50,000 units, which
is total capacity for a quarter. The sales forecasts for each of the last two
quarters of the year remain at 25,000 units. Actual fixed costs incurred remain
constant in total and variable costs remain constant on per unit basis.
Required:
Computations:
•
Convert
the divisional absorption income statement to a contribution margin income
statement for the quarter. showing how to convert from one
approach to another. This example is for guidance only and the numbers have no
bearing on Jokkmok Industries. You can also find several videos on YouTube that
explain the difference between the two types of income statements.
•
Prepare
absorption and contribution margin income statements for the succeeding quarter
for the division.
•
Compute
production costs per unit for both approaches and for both quarters.
Discussion:
•
Did
Mr. Rosen improve his performance for the second quarter? Indicate the
information you used for your assessment.
•
Can
you make any suggestions for reporting in the future?
•
Do you
think Mr. Rosen should be seriously considered for the CEO position? Why or why
not?
•
Discuss
three shortcomings of the absorption approach for internal decision-making.
Modular Case Assignment Expectations
It is
important to answer the questions as posed. The discussion should be
from 3 to 5 pages and written in a clear and concise manner. Support your
discussion with references in APA format. You are encouraged to use Excel or
other compatible spreadsheet when computations are involved.