Question

Royal Lawncare Company produces and sells two packaged products—Weedban and Greengrow. Revenue and cost information relating to the products follow:
Product
Weedban Greengrow
Selling price per unit $9.00 $36.00
Variable expenses per unit $2.80 $13.00
Traceable fixed expenses per year $132,000 $37,000

Common fixed expenses in the company total $100,000 annually. Last year the company produced and sold 35,000 units of Weedban and 25,000 units of Greengrow.

Required:
Prepare a contribution format income statement segmented by product lines.

Answer 1

Answer:

Contribution is sales revenue less variable cost. In multiple products environment, it is important that the producer have information about the performance of each product. This is useful for decision making purpose. See income statement below

Explanation:

An income statement showing contribution would suffice:

       Royal Lawrence Company

                                                                  Income statement

                                                      Weedban Greengrow Total

                                                                    $                   $                   $

Sales (sp/unit × unit)                            315,000   900,000         1,215,000

Variable cost (Vc/unit × units)              (98,000)      (325,000)  (423,000)

Contribution                                           217,000      575,000   792,000

Specific fixed cost                                (132,000)   (37,000) (169,000)

Product profit                                   85,000     538,000   623,000

Common Fixed cost                                                     (100,000)

Total profit                                                                     523,000

Answer 2

Answer:

                                                   Royal Lawrence Company

                                                         Income statement                                      

                                 Amount ($'000)     Amount ($'000)    Amount ($'000)

                                        Weedban               Greengrow             Total

Sales                                   315,000                900,000              1,215,000

Variable cost                     (98,000)               (325,000)             (423,000)

Contribution margin           217,000                 575,000              792,000

Traceable fixed cost           (132,000)               (37,000)             (169,000)

Net income                            85,000               538,000             623,000

Common Fixed cost                                                                     (100,000)

Total Net income                                                                          523,000

Explanation:

Contribution is difference between total sales and total variable cost. Both sales and variable cost are influenced by the activity level.

The difference between the contribution margin and fixed cost gives the net income. This is the flow of items in the typical format of a contribution income statement.

Total sales

for Weedban

= $9 × 35,000

= $315,000

For Greengrow

= $36 × 25,000

= $900,000

Total variable cost

for Weedban

= $2.80 × 35,000

= $98,000

For Greengrow

= $13 × 25,000

= $325,000