Thursday, 2 August 2012

Maxwell Company manufactures and sells a single product. The following costs were incurred during

Maxwell Company manufactures and sells a single product. The following costs were incurred during the company’s first year of operations:
   
     
  Variable costs per unit:    
    Manufacturing:    
        Direct materials   $ 18  
        Direct labor   $ 7  
        Variable manufacturing overhead   $ 2  
        Variable selling and administrative   $ 2  
  Fixed costs per year:    
    Fixed manufacturing overhead $ 200,000  
    Fixed selling and administrative expenses $ 110,000  

   
      During the year, the company produced 20,000 units and sold 16,000 units. The selling price of the company’s product is $50 per unit.
   
Required:
1. Assume that the company uses absorption costing:
   
a. Compute the unit product cost. (Omit the "$" sign in your response.)
   
  Unit product cost $ 37 correct  
   
b.
Prepare an income statement for the year. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the "$" sign in your response.)
   
Absorption Costing Income Statement
  Sales correct $ 800,000 correct  
  Cost of goods sold correct 592,000 correct  
 
  Gross margin correct 208,000 correct  
  Selling and administrative expenses correct 142,000 correct  
 
  Net operating income (loss) correct $ 66,000 correct  
 


   
2. Assume that the company uses variable costing:
   
a. Compute the unit product cost. (Omit the "$" sign in your response.)
   
  Unit product cost $ 27 correct  
   
b.
Prepare an income statement for the year. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the "$" sign in your response.)
   
Variable Costing Income Statement
  Sales correct   $ 800,000 correct  
  Less: Variable expenses    
       Variable selling expense correct $  correct    
       Variable cost of goods sold correct  correct   464,000 correct  
 

  Contribution margin correct   336,000 correct  
  Less: Fixed expenses    
       Fixed manufacturing overhead correct  correct    
       Fixed selling and administrative expenses correct  correct   310,000 correct  
 

  Net operating income (loss) correct   $ 26,000 correct  
   


   
3.
The company’s controller believes that the company should have set last year’s selling price at $51 instead of $50 per unit. She estimates the company could have sold 15,000 units at a price of $51 per unit, thereby increasing the company’s gross margin by $2,000 and its net operating income by $4,000.
   
a.
Do you think the absorption costing approach is the proper way to assess the merits of the proposed price increase?
   
  No correct

b.
Do you think the variable costing approach is the proper way to assess the merits of the proposed price increase?
   
  Yes correct


c.
Using the variable costing approach, by how much will profits increase or decrease if the price increase in implemented?

  Decrease by correct $ n/r incorrect