The following data were adapted from a recent income statement of Caterpillar Inc. (CAT) for the year ended December 31: (in millions) Sales $38,537 Cost of goods sold $(28,309) Selling, administrative, and other expenses (9,730) Total expenses $(38,039) Operating income $498 Assume that $8,500 million of cost of goods sold and $4,000 million of selling, administrative, and other expenses were fixed costs. Inventories at the beginning and end of the year were as follows: Beginning inventory $9,700 Ending inventory 8,614 Also, assume that 30% of the beginning and ending inventories were fixed costs. a. Prepare an income statement according to the variable costing concept for Caterpillar Inc. Round numbers to nearest million. Caterpillar Inc. Variable Costing Income Statement (assumed) For the Year Ended December 31 Sales $ Variable cost of goods sold: Beginning inventory $ $ $ Fixed costs: $ $

Net Profit        $  823.8 millions

Explanation:

Caterpillar Inc.

Variable Costing Income Statement (assumed)

For the Year Ended December 31

                                                        All figures in millions

Sales                                                     $38,537

Variable cost of goods sold:              

Variable Beginning Inventory                 $ 6790

Add Variable Cost of Goods Manufactured $18723

Less Variable Ending Inventory $  6029.8

Total Variable cost of goods sold:                 19483.2

Manufacturing Margin                                   19053.8

Less Variable  Admin. and Selling Exp.  

(9730- 4000)                                               5730

Contribution Margin                                       13323.8

Less Fixed Costs

Less Fixed  Cost of goods sold $ 8,500

Fixed Admin. and Selling expenses:  $  4000

Total Fixed Costs                                                12500

Net Profit                                                   $  823.8 millions

Working:

First we find the variable cost of goods manufactured. For this we calculate the variable ending and beginning inventories.

Calculations

Fixed Beginning inventory 30% of $9,700= $ 2910

Variable Beginning Inventory= $9,700-$ 2910= $ 6790

Fixed Ending Inventory 30% of $ 8,614= $ 2584.2

Variable Ending Inventory= $ 8,614-$ 2584.2= $  6029.8

Cost of goods sold $ 28,309

Add Ending Inventory  8,614

Less Beginning Inventory $9,700

Cost Of Goods Manufactured 27223

Less Manufacturing Fixed Costs 8500

Variable Cost of Goods Manufactured  $ 18723

We subtract the fixed cost of goods sold  and fixed selling expenses to get the  net profit.  In variable costing the fixed expenses are treated as a period cost rather than a product cost.

Total expenses $(38,039)

Fixed expenses:  $  4000

Variable expenses : $ 34039

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