PROBLEM 5-9. Using Information from a Variable Costing Income Statement to Make

ID: 2418482 • Letter: P

Question

PROBLEM 5-9. Using Information from a Variable Costing Income Statement to Make a Decision [LO 2, 5] Below is a variable costing income statement for Wilner Glass Company, a maker of bottles for the beverage industry. For the coming year,the company is considering hiring two additional sales representatives at $80,000 each for base salary plus 5 percent of their sales for commissions. The company anticipates that each sales representative will generate $900,000 of incremental sales.

Wilner Glass Company

Income Statement

For the Year Ending December 31,2014

Sales $20,000,000

Less:

Variable cost of goods sold $8,000,000

Variable selling expense 4,000,000 12,000,000

Contribution margin 8,000,000

Less:

Fixed production expense 2,600,000

Fixed selling expense 1,800,000

Fixed administrative expense 3,000,000 7,400,000

Net income $ 600,000

Required

a. Calculate the impact on prot of the proposed hiring decision.Should the company hire the two additional sales representatives?

b. Consider the analysis of the decision performed by the company’s chief accountant and compare it to your analysis in part a.What is the fundamental aw in the chief accountant’s work?

Analysis by Chief Accountant

Incremental sales $1,800,000

Income per dollar of sales in 2014

($600,000 ÷$20,000,000) 0.03

54,000

Less increase in base salary 160,000

Effect on prot ($ 106,000)

Explanation / Answer

a) Decision making

Incremental sales 1,800,000

Less: Variable cost (40% of sales) (720,000)

Variable selling esxpense (20% of sales ) ( 360,000)

Increase in salary:

(80,000 *2) $160,000

(1,800,000@5%) 90,000 (250,000)

Incremtal profit $470,000

Yes

Variable cost percentage is calulated by dividing original variable cost by original sales

b) He calculated the income by taking profit margin which is calulated by considering the fixed cost which is wrong as fixed cost is sunk cost and should only be considered if it is relevant for decision making purpose.