Question 4 Sarasota Industries makes artificial Christmas trees. The unit costs

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Question 4 Sarasota Industries makes artificial Christmas trees. The unit costs for producing a tree are: Direct materials Direct labor Variable overhead Fixed overhead $27 $14 $14 $6 The company also incurs $2 per tree in variable selling and administrative costs and $3,500 in fixed marketing costs. At the beginning of the year the company had 830 trees in the beginning Finished Goods Inventory. The company produced 2,260 trees during the year. Sales totaled 1,700 trees at a price of $105 per tree. (a) Based on absorption costing, what was the company's operating income for the year? Company's operating income (b) Based on variable costing, what was the company's operating income for the year? Company's operating income (c) Assume that in the following year the company produced 2,260 trees and sold 2,630. Based on absorption costing, what was the operating income for that year? Based on vaable costing, what was the operating income for that year? Ahsorntion Costina Variable Costina

Explanation / Answer

Variable costing Year 1 Year 2 Direct material 27 27 Direct labor 14 14 Variable manufacturing overheads 14 14 Product cost per unit 55 55 Units manufactured 2260 2260 Units sold 1,700 2,630 Income statement Sales revenue 178500 276150 Less Variable expense Variable cost of goods sold 93500 144650 Variable selling and admin expense 3400 5260 Total variable expense 96900 149910 Contribution margin 81600 126240 Less Fixed cost Fixed manufacturing expense 13560 13560 Fixed Admin expense 3500 3500 Total fixed expenses 17060 17060 Net operating income 64540 109180 1 Absorption costing Year 1 Year 2 Direct material 27 27 Direct labor 14 14 Variable manufacturing overheads 14 14 Fixed manufacturing 6 6 Total product cost 61 61 Units produced 2260 2260 Units sold 1,700 2,630 Income statement 1st year 2nd year Sales revenue 178500 276150 cost of goods sold Beginning inventory 50630 84790 cost of goods manufactured 137860 137860 Add Goods available for sale 188490 222650 Ending inventory (1390*61) 84790 62220 (1020*61) Less Cost of goods sold 103700 160430 Gross profit 74800 115720 Selling and admin expenses Less Variable selling and admin expense 3400 5260 Fixed Admin expense 3500 3500 Total Selling and admin expenses 6900 8760 Net operating income 67900 106960

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