Reference no: EM13876139

Value Streams and Profit Centers Johnson Company is a manufacturer of very inexpensive DVD players and television sets. The company uses recycled parts and a highly structured manufacturing process to keep costs low so that it can sell at very low prices. The company uses lean account- ing procedures to help keep costs low and to examine financial performance. Johnson uses value streams to study the profitability of its two main product groups, DVD players and TVs. Information about finished goods inventory, sales, production, and average sales price follows.

Johnson's costs for the current quarter are as follows. Note that some of the company's manu- facturing and selling costs are traceable directly to the two value streams, while other costs are not traceable. Johnson considers all fixed costs to be controllable by the manager of each group. Also, Johnson's value stream shows operating income determined by the full cost method; the difference from the traditional full cost income statement is that the effect on income from a change in inven- tory is shown as a separate item on the value stream income statement.

Required

1. Consider Johnson's two value streams as profit centers and use the contribution income statement as a guide to develop a value stream income statement for the company. In your solution, replace the term controllable margin with value-stream income. Be sure to include the inventory effect on profit as a separate line item in your value stream income statement.

2. Interpret the findings of the analysis you completed in part 1.

3. What is the benefit of the use of value streams for evaluating profit centers relative to the use of the contribution income statement for individual product lines?