# For the coming year, Archway C

For the coming year, Archway Computers Inc. expects to produceand sell 200,000 computers. Of these, 80,000 will be consumer(personal) computers and 120,000 will be small business computers.Common fixed overhead is \$700,000. Additional information for thecoming year is as follows:

Price                                                               \$780                                       \$2,300

Unit DirectMaterials                                    500                                         1,800

Unit DirectLabour                                        160                                            290

Unit Variable SellingExpenses                   75                                              70

Fixed selling and administrative expense for Archway ComputersInc. is \$3,460,000 per year.

Required:

Calculate the unit variable cost under variable costing. Is thiscost the same as unit variable product cost? Why or why not?

Prepare a segmented variable-costing income statement for nextyear. The segments correspond to product lines: consumer computersand small business computers.

Solution

Archway Computers

1. Computation of unit variable cost under variable costingmethod:
 Consumer Computers Small Business Computers Unit variable cost: Direct material \$500 \$1,800 Direct labot \$160 \$290 variable overhead \$40 \$75 Variable selling expenses \$75 \$70 total unit variable cost \$775 \$2,235 Unit Variable Product Cost Consumer Computers Small Business Computers Unit variable product cost: Direct material \$500 \$1,800 Direct labot \$160 \$290 variable overhead \$40 \$75 Total unit variable product cost \$700 \$2,165

Unit variable cost and unit variable product cost are different.The difference is due to the inclusion of variable selling expensesin the unit variable cost. The unit variable product cost comprisesthose costs that are incurred in the production such as directmaterial cost, direct labor cost and variable overhead. Sellingexpenses are not part of production cost.

Segmented Variable Costing Income Statement

 Consumer Computers Small Business Computers Total Sales (units) 80,000 120,000 200,000 Sales (Dollars) \$62,400,000 \$276,000,000 338,400,000 Variable costs \$62,000,000 \$268,200,000 330,200,000 Contribution margin \$400,000 7,800,000 \$8,200,000 Direct fixed overhead \$120,000 \$200,000 \$320,000 Segment Margin \$280,000 \$7,600,000 \$7,880,000 Common Fixed Costs \$3,460,000 Operating Income \$4,420,000

Sales

• Consumer Computers = 80,000 x \$780 = \$62,400,000
• Business Computers = 120,000 x 2,300 = \$276,000,000

Variable cost

• Consumer Computers = 80,000 x \$775 = \$62,000,000
• Business Computers = 120,000 x 2,235 = \$268,200,000

Contribution margin = sales – variable cost

Segment margin = contribution margin – direct fixed overhead

Operating income = total segment margin – common fixed costs

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