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

  

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	$ 800,000
Cost of goods sold	592,000
Gross margin	208,000
Selling and administrative expenses	142,000
Net operating income (loss)	$ 66,000

  

2.	Assume that the company uses variable costing:

  

a.	Compute the unit product cost. (Omit the "$" sign in your response.)

  

Unit product cost

$ 27

  

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		$ 800,000
Less: Variable expenses
Variable selling expense	$
Variable cost of goods sold		464,000
Contribution margin		336,000
Less: Fixed expenses
Fixed manufacturing overhead
Fixed selling and administrative expenses		310,000
Net operating income (loss)		$ 26,000

  

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

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

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

Decrease by

$ n/r