Question

Texas Controls Inc. began operations in 2019 to manufacture a single product. There are no ending work-in-process inventories. Relevant data for the year follow:

OPERATING DATA FOR 2019
Quantities:
Beginning inventories, finished goods		–0–
Units produced during the year		6,300
Units sold during the year		5,600
Costs:
Direct materials ($30 per unit)	$	189,000
Direct labor ($28 per unit)		176,400
Variable factory overhead ($16 per unit)		100,800
Fixed factory overhead		62,000
Variable selling and administrative expenses ($15 per unit)		84,000
Fixed selling and administrative expenses		81,000
Selling price for each unit		124

Required:

1. Prepare an income statement for 2019 using direct costing.
2. Assume that the company has an opportunity to sell 700 units of the product in a foreign country for $98 per unit. No fixed or variable selling and administrative expenses would be incurred in connection with these units except shipping costs of $14 per unit and miscellaneous administrative expenses of $2 per unit. The company has idle capacity, and the order would not affect present markets. Would it be profitable for the company to accept the order?

Analyze:
What percentage of the foreign sales order would be realized as marginal income?

a.

Prepare an income statement for 2019, using direct costing.

	TEXAS CONTROLS INC. Income Statement (Direct Costing) Year Ended December 31, 2019 Cost of goods sold Cost of goods manufactured Total cost of goods manufactured $0 Cost of Goods Sold $0 $0 Fixed costs and expenses Total fixed costs and expenses 0 $0

b.

Assume that the company has an opportunity to sell 700 units of the product in a foreign country for $98 per unit. No fixed or variable selling and administrative expenses would be incurred in connection with these units except shipping costs of $14 per unit and miscellaneous administrative expenses of $2 per unit. The company has idle capacity, and the order would not affect present markets. Compute marginal income or loss on order.

	TEXAS CONTROLS INC. Computations Foreign Sales Order Sales Variable manufacturing costs Materials Labor Overhead Total variable manufacturing costs 0 Manufacturing margin $0 Variable shipping and administrative costs Marginal income on order $0

c.

Would it be profitable for the company to accept the order?

	Would it be profitable for the company to accept the order?

__________

d.

What percentage of the foreign sales order would be realized as marginal income? (Round your percentage answer to 1 decimal place. i.e., 0.123 should be considered as 12.3%.)

	Percentage of marginal income on foreign sales order %

________

Answer 1

direct costing considers fixed cost as period cost. Fixed cost are not part of ending inventory.

variable selling expense are related to products sold. so it wont be part of inventory.

1.

TEXAS CONTROLS INC. Income Statement (Direct Costing) Year Ended December 31, 2019 Revenue 5600*124$ 694,400 Cost of goods sold Cost of goods manufactured Direct material 189,000 Direct Labor 176,400 Variable overhead 100,800 Total cost of goods manufactured 466,200 Less: ending Inventory [6300-5600] 700units * [30+28+16] 51,800 Cost of Goods Sold [466200-51800] 414,400 Manufacturing Margin [694,400-414,400] $280,000 Less: variable marketing and administrative expense $84000 contribution margin [280000-84000] 196,000 Fixed costs and expenses Manufacturing Overhead 62,000 Fixed selling expense 81,000 Total fixed costs and expenses [62000+81000] 143,000 Net operating income [196000-143000] $53000

b.

	TEXAS CONTROLS INC. Computations Foreign Sales Order Sales [700unit*98$] 68,600 Variable manufacturing costs Materials [700*30] 21000 Labor [700*$28] 19600 Overhead [700*$16] 11200 Total variable manufacturing costs 51,800 Manufacturing margin [68600-51800] $16,800 Variable shipping and administrative costs [$14+$2]*700Units $11,200 Marginal income on order $5,600

3. As from above we could see that marginal income of company would increase by $5600 after accepting order.

So it should accept the order as it is profitable for the company.

4.% of marginal income on foreign sales = marginal income/ foreign sales

=5600$/68600$

8.16%