During Denton Company’s first two years of operations, the company reported absorption costing net operating income as follows:

During Denton Company’s first two years of operations, the company reported absorption costing net operating income as follows:

	Year 1		Year 2
Sales (@ $50 per unit)	$	1,000,000	$	1,500,000
Cost of goods sold (@ $34 per unit)		680,000		1,020,000
Gross margin		320,000		480,000
Selling and administrative expenses*		310,000		340,000
Net operating income	$	10,000	$	140,000

* $3 per unit variable; $250,000 fixed each year.

The company’s $34 unit product cost is computed as follows:

Direct materials	$	8
Direct labor		10
Variable manufacturing overhead		2
Fixed manufacturing overhead ($350,000 ÷ 25,000 units)		14
Absorption costing unit product cost	$	34

   

Production and cost data for the two years are given below:

	Year 1	Year 2
Units produced	25,000	25,000
Units sold	20,000	30,000

Required:

1.	Prepare a variable costing contribution format income statement for each 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
	Year 1	Year 2
Sales	$	$
Variable expenses:
Variable cost of goods sold
Variable selling and administrative expenses
Total variable expenses
Contribution margin
Fixed expenses:
Fixed manufacturing overhead
Fixed selling and administrative expenses
Total fixed expenses
Net operating income (loss)	$	$

2.	Reconcile the absorption costing and variable costing net operating income figures for each year. (Loss amounts and amounts to be deducted should be indicated with a minus sign. Omit the "$" sign in your response.)

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes
	Year 1	Year 2
Variable costing net operating income (loss)	$	$
Add (deduct) fixed manufacturing overhead   deferred in (released from) inventory under   absorption costing
Absorption costing net operating income (loss)	$	$

Explanation:

1. 

The unit product cost under the variable costing is computed as follows:

Direct materials	$	8
Direct labor		10
Variable manufacturing overhead		2
Variable costing unit product cost	$	20

 

	Year 1		Year 2
Variable cost of goods sold @ $20 per unit	$	400,000	$	600,000
Variable selling and administrative expenses @ $3 per unit	$	60,000	$	90,000

2.

Add (deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing (5,000 units × $14 per unit in Year 1; 5,000 units × $14 per unit in Year 2) = $70,000

Wiengot Antennas, Inc., produces and sells a unique type of TV antenna. The company has just opened a new plant to manufacture the antenna, and the following cost and revenue data have been provided for the first month of the plant’s operation.

Wiengot Antennas, Inc., produces and sells a unique type of TV antenna. The company has just opened a new plant to manufacture the antenna, and the following cost and revenue data have been provided for the first month of the plant’s operation.

Beginning inventory		0
Units produced		40,000
Units sold		35,000
Selling price per unit		$60
Selling and administrative expenses:
Variable per unit		$2
Fixed (total)	$	560,000
Manufacturing costs
Direct materials cost per unit		$15
Direct labor cost per unit		$7
Variable manufacturing overhead cost per unit		$2
Fixed manufacturing overhead cost (total)	$	640,000

Because the new antenna is unique in design, management is anxious to see how profitable it will be and has asked that an income statement be prepared for the month.

   

Required:

1.	Assume that the company uses absorption costing.

  

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

Unit product cost

$

b.	Prepare an income statement for the month. (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	$
Cost of goods sold
Gross margin
Selling and administrative expenses
Net operating income (loss)	$

    

2.	Assume that the company uses variable costing.

   

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

Unit product cost

$

b.	Prepare a contribution format income statement for the month. (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		$
Variable expenses:
Variable cost of goods sold	$
Variable selling and administrative expenses
Contribution margin
Fixed expenses:
Fixed manufacturing overhead
Fixed selling and administrative expenses
Net operating income (loss)		$

Explanation: 1.
a.
The unit product cost under absorption costing is:
 

Direct materials	$	15
Direct labor		7
Variable manufacturing overhead		2
Fixed manufacturing overhead (640,000 ÷ 40,000 units)		16
Absorption costing unit product cost	$	40

b.

Sales (35,000 units × $60 per unit) = $2,100,000

Cost of goods sold (35,000 units × $40 per unit) = $1,400,000

Selling and administrative expenses (35,000 units × $2 per unit) + $560,000 = $630,000

2.
a.
The unit product cost under variable costing is:
 

Direct materials	$	15
Direct labor		7
Variable manufacturing overhead		2
Variable costing unit product cost	$	24

b.

Sales (35,000 units × $60 per unit) = $2,100,000

Variable cost of goods sold (35,000 units × $24 per unit) = $840,000

Variable selling and administrative expense (35,000 units × $2 per unit) = $70,000

CompuDesk, Inc., makes an oak desk specially designed for personal computers.

CompuDesk, Inc., makes an oak desk specially designed for personal computers. The desk sells for $200. Data for last year’s operations follow:

Units in beginning inventory		0
Units produced		10,000
Units sold		9,000
Units in ending inventory		1,000
Variable costs per unit:
Direct materials		$  60
Direct labor		30
Variable manufacturing overhead		10
Variable selling and administrative		20
Total variable cost per unit		$ 120
Fixed costs:
Fixed manufacturing overhead	$	300,000
Fixed selling and administrative		450,000
Total fixed costs	$	750,000

Required:

1.	Assume that the company uses variable costing. Compute the unit product cost for one computer desk. (Omit the "$" sign in your response.)

Unit product cost

$ 100

2.	Assume that the company uses variable costing. Prepare a contribution format 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		$ 1,800,000
Variable expenses:
Variable cost of goods sold	$
Variable selling and administrative expenses		1,080,000
Contribution margin		720,000
Fixed expenses:
Fixed selling and administrative expenses
Fixed manufacturing overhead		750,000
Net operating income (loss)		$ -30,000

3.	What is the company’s break-even point in terms of units sold?

Break-even point

n/r

units

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