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 $800,000. Mr. Rosen has been looking at the report for the first three months of the year and is not happy with the results.
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DivisionIncomeStatement
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For the Quarter Ending March 31, 2014
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Production: 25,000 units
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Sales (25,000 units)
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$2,500,000
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Cost of goodssold
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1,800,000
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Grossprofit
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$700,000
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Selling& general expenses
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300,000
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Net income
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$400,000
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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. All selling & general expenses are fixed.
Case Assignment
Required:
Computations:
- Convert the divisional absorption income statement to a contribution margin income statement for the quarter. 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? Whyorwhynot?
- Discuss three shortcomings of the absorption approach for internal decision-making.