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Chapter 21: Q-21-3RQ (page 1166)
How are absorption costing and variable costing the same? How are they different?
Answer
Both methods consider variable cost as product cost.
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Explain how increasing production can increase gross profit when using absorption costing.
Question: Preparing variable costing income statements, production less than sales
Refer to your answers to Exercise E21-16. In May 2018, ReVitalAde produced 22,000 cases of powdered drink mix and sold 23,000 cases, of which 1,000 were produced in April. The sales price was \(29, variable costs were \)12 per case (\(9 manufacturing and \)3 selling and administrative), and total fixed costs were \(100,000 (\)91,000 manufacturing and $9,000 selling and administrative).
Requirements
Using variable and absorption costing, making decisions
The 2018 data that follow pertain to Mike鈥檚 Magnificent Eyewear, a manufacturer of swimming goggles. (Mike鈥檚 Magnificent Eyewear had no beginning Finished Goods Inventory in January 2018.)
Number of goggles produced 245,000
Number of goggles sold 230,000
Sales price per unit \( 28
Variable manufacturing cost per unit 10
Sales commission cost per unit 2
Fixed manufacturing overhead 1,960,000
Fixed selling and administrative costs 260,000
Requirements:
Analyzing profitabilityFather Furniture Company manufactures and sells oak tables and chairs. Price and cost data for the furniture follow:
Tables Chairs Sales Price \( 800 \) 70 Variable manufacturing costs 60025Sales commission (10%) 807Relative Furniture has three sales representatives: Adam, Ben, and Caleb. Adam sold 100 tables with 6 chairs each. Ben sold 110 tables with 4 chairs each. Caleb sold 80 tables with 8 chairs each.
Requirements
1. Calculate the total contribution margin and the contribution margin ratio for each sales representative (round to two decimal places).
2. Which sales representative has the highest contribution margin ratio? Explain why.
Using variable and absorption costing, making decisions The 2018 data that follow pertain to Eli鈥檚 Electric Eyewear, a manufacturer of swimming goggles. (Eli鈥檚 Electric Eyewear had no beginning Finished Goods Inventory in January 2018.)
Number of goggles produced 245,000 Number of goggles sold 215,000 Sales price per unit \( 22Variable manufacturing cost per unit 8Sales commission cost per unit 5Fixed manufacturing overhead 1,470,000 Fixed selling and administrative costs 250,000 Requirements
1. Prepare both conventional (absorption costing) and contribution margin (variable costing) income statements for Eli鈥檚 Electric Eyewear for the year ended December 31, 2018.
2. Which statement shows the higher operating income? Why?
3. Eli鈥檚 ElectricEyewear鈥檚 marketing vice president believes a new sales promotion that costs \)60,000 would increase sales to 220,000 goggles. Should the company go ahead with the promotion? Give your reasoning.
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