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Chapter 21: Q14SE (page 1170)

Question: Computing absorption costing operating income

Refer to the information for Concord, Inc.

Requirements

  1. Using absorption costing, calculate the unit product cost.
  2. Prepare an income statement using the traditional format.

Use the following information for Exercises E21-14 and E21-15.

Concord, Inc. has collected the following data for November (there are no beginning inventories):

Units produced and sold 500 units Sales price $ 450 per unit Direct materials 64 per unit Direct labor 68 per unit Variable manufacturing overhead 26 per unit Fixed manufacturing overhead 7,500 per month Variable selling and administrative costs 15 per unit Fixed selling and administrative costs 4,400 per month

Short Answer

Expert verified

Answer

  1. Total unit product cost is $173.
  2. Gross profit is $138,500 and operating income is $126,600.

Step by step solution

01

Calculation of unit product cost using absorption costing

Particulars

Amount

Direct materials

$64

Direct labor

$68

Variable manufacturing overhead

$26

Fixed manufacturing overhead ($7,500/500)

$15

Total unit product cost

$173

02

Income statement using absorption costing

Particulars

Amount

Net sales revenue ($450x500)

$225,000

Less: Cost of goods sold (173x500)

$86,500

Gross profit

$138,500

Less: Selling and administrative cost

Variable selling and administrative cost ($15x500)

$7,500

Fixed selling and administrative cost

$4,400

Operating Income

$126,600

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Most popular questions from this chapter

Question: Preparing variable and absorption costing income statements

Game Store manufactures video games that it sells for \(38 each. The company uses a fixed manufacturing overhead allocation rate of \)3 per game. Assume all costs and production levels are exactly as planned. The following data are from Game Store鈥檚 first two months in business during 2018:

October November

Sales 1,500 units 2,900 units

Production 2,800 units 2,800 units

Variable manufacturing cost per game \( 16 \) 16

Sales commission cost per game 8 8

Total fixed manufacturing overhead 8,400 8,400

Total fixed selling and administrative costs 8,000 8,000 Requirements

1. Compute the product cost per game produced under absorption costing and under variable costing.

2. Prepare monthly income statements for October and November, including columns for each month and a total column, using these costing methods:

a. absorption costing.

b. variable costing.

3. Is operating income higher under absorption costing or variable costing in October? In November? Explain the pattern of differences in operating income based on absorption costing versus variable costing.

4. Determine the balance in Finished Goods Inventory on October 31 and November 30 under absorption costing and variable costing. Compare the differences in inventory balances and the differences in operating income. Explain the differences in inventory balances based on absorption costing versus variable costing.

Analyzing profitability

Relative Furniture Company manufactures and sells oak tables and chairs. Price and cost data for the furniture follow:

Tables Chairs

Sales Price \( 1,400 \) 50

Variable manufacturing costs 1,148 21

Sales commission (8%) 112 4

Relative Furniture has three sales representatives: Abe, Brett, and Corrin. Abe sold 50 tables with 4 chairs each. Brett sold 110 tables with 6 chairs each. Corrin sold 90 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.

Question: Computing variable costing operating income Refer to the information for Concord, Inc.

Requirements:

  1. Using variable costing, calculate the unit product cost.
  2. Prepare an income statement using the contribution margin format.

Use the following information for Exercises E21-14 and E21-15.

Concord, Inc. has collected the following data for November (there are no beginning inventories):

Units produced and sold 500 units Sales price $ 450 per unit Direct materials 64 per unit Direct labor 68 per unit Variable manufacturing overhead 26 per unit Fixed manufacturing overhead 7,500 per month Variable selling and administrative costs 15 per unit Fixed selling and administrative costs 4,400 per month

Using variable costing, service company

Professional Pool Cleaning Service provides pool cleaning services to residential customers. The company has three employees, each assigned to specific customers. The company considers each employee鈥檚 territory as a business segment. The company incurs variable costs that include the employees鈥� wages, pool chemicals, and gas for the service vans. Fixed costs include depreciation on the service vans. Following is the income statement for the month of July:

Requirements

  1. Calculate the contribution margin ratio for each business segment.
  2. The business segments had the following numbers of customers: Birman, 60; Meech, 70; and Frond, 40. Compute the service revenue per customer, variable cost per customer, and contribution margin per customer for each business segment.
  3. Which business segment was most profitable? List some possible reasons why this segment was most profitable. How might the various reasons affect the company in the long term?

Setting sales prices The Sweet Treats Company manufactures candy that is sold to food distributors. The company produces at full capacity for six months each year to meet peak demand during the 鈥渃andy season鈥� from Halloween through Valentine鈥檚 Day. During the other six months of the year, the manufacturing facility operates at 75% of capacity. The Sweet Treats Company provides the following data for the year:

Cases of candy produced and sold 1,800,000 cases Sales price $ 37.00 per case Variable manufacturing costs 20.00 per case Fixed manufacturing costs 6,400,000 per year Variable selling and administrative costs 2.00 per case Fixed selling and administrative costs 3,500,000 per year The Sweet Treats Company receives an offer to produce 13,000 cases of candy for a special event. This is a one-time opportunity during a period when the company has excess capacity. What is the minimum sales price The Sweet Treats Company should accept for the order? Explain why
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