Wednesday, 1 April 2015

Tami Tyler opened Tami’s Creations, Inc., a small manufacturing company, at the beginning of the year. Getting the company through its first quarter of operations placed a considerable strain on Ms. Tyler’s personal finances. The following income statement for the first quarter was prepared by a friend who has just completed a course in managerial accounting at State University.

Tami Tyler opened Tami’s Creations, Inc., a small manufacturing company, at the beginning of the year. Getting the company through its first quarter of operations placed a considerable strain on Ms. Tyler’s personal finances. The following income statement for the first quarter was prepared by a friend who has just completed a course in managerial accounting at State University.
 
Tami’s Creations, Inc.
Income Statement
For the Quarter Ended March 31
  Sales (22,000 units)     $ 798,600    
  Variable expenses:        
     Variable cost of goods sold $ 259,600        
     Variable selling and administrative   169,400       429,000    
 



  Contribution margin       369,600    
  Fixed expenses:        
     Fixed manufacturing overhead   205,000        
     Fixed selling and administrative   215,000       420,000    
 



  Net operating loss     $ ( 50,400)   
 








 
    Ms. Tyler is discouraged over the loss shown for the quarter, particularly because she had planned to use the statement as support for a bank loan. Another friend, a CPA, insists that the company should be using absorption costing rather than variable costing and argues that if absorption costing had been used the company would probably have reported at least some profit for the quarter.
 
At this point, Ms. Tyler is manufacturing only one product, a swimsuit. Production and cost data relating to the swimsuit for the first quarter follow:
 
     
  Units produced   25,000   
  Units sold   22,000   
  Variable costs per unit:    
     Direct materials $ 7.50   
     Direct labor $ 2.60   
     Variable manufacturing overhead $ 1.70   
     Variable selling and administrative $ 7.70   

 
Required:
1. Complete the following:
 
a.
Compute the unit product cost under absorption costing. (Round your intermediate and final answers to 2 decimal places.)

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Explanation: