Question

Dig a Little Deeper, Inc. manufactures and sells two types of shovels: edging and trench. The following information was extracted from the company's accounting records from the last period:

Edging Trench
Sales Revenue $300,000
Product Costs $220,000
Period Costs $25,000

The edging product line's variable product costs can be separated as follows: direct materials of $60,000, direct labor of $30,000, and manufacturing overhead of $35,000. The remaining product costs are traceable fixed manufacturing overhead costs. The period costs of the edging line are made up of $15,000 of sales commissions, which is paid as a percentage of sales revenue, and $10,000 of arbitrarily allocated common fixed costs. The trench line has a contribution margin percentage of 60%. Of the fixed costs in the trench line, $30,000 are traceable fixed costs, and the remainder are arbitrarily allocated common fixed costs.

Which of the following statements is incorrect?

a) Traceable costs for the trench line are $140,000.

b) The company's operating income for the period equals $150,000.

c) The edging line's performance should be analyzed based on a segment margin of $65,000.

d) The variable cost percentage of the trench line is 40%.

Answer 1

The statement that traceable costs for the trench line are $140,000 is incorrect because there is not enough data to verify it. Additionally, without the total costs for both product lines, the company's operating income cannot be confirmed, and edging line's performance should be assessed on the segment margin which is $65,000 excluding allocated common fixed costs.

Step-by-step explanation:

The statement 'Traceable costs for the trench line are $140,000' is incorrect. To determine if this statement is true, we must subtract the trench line's traceable fixed costs from the total product costs. The trench line's contribution margin percentage is given as 60%, which means the variable cost percentage is 40%. However, without the trench line's total sales revenue or total product costs, this statement cannot be verified and thus should be considered incorrect.

The company's operating income cannot be determined accurately without the specific figures for both the edging and trench product lines. Since we do not have the total costs for the trench line, we cannot add this to the edging line's costs to determine if the company's operating income for the period is $150,000.

Lastly, the edging line's performance based on a segment margin of $65,000 assesses profitability after accounting for direct expenses and traceable fixed costs. The segment margin is found by subtracting the variable product costs and traceable fixed costs from the sales revenue and does not include arbitrarily allocated common fixed costs.