Violins- by - Lucy produces student-grade violins for beginning violin students.
ID: 2410395 • Letter: V
Question
Violins- by - Lucy produces student-grade violins for beginning violin students. The company produced 2,400 violins in its first month of operations. At month-end, 650 finished violins remained unsold. There was no inventory in work in process. Violins were sold for $117.50 each. Total costs from the month are as follows:
Data Table:
Direct materials used: $111,400
Direct labor: $60,000
Variable manufacturing overhead: $35,000
Fixed manufacturing overhead: $52,800
Variable selling and administrative expenses: $11,000
Fixed selling and administrative expenses: $13,500
The company prepares traditional (absorption costing) income statements for its bankers. Lucy would also like to prepare contribution margin income statements for management use.
Read the requirements:
Gross profit
Contribution margin
Total expenses shown BELOW the GROSS PROFIT line
Total expense shown BELOW the CONTRIBUTION MARGIN line
Dollar value of ending inventory under absorption costing
Dollar value of ending inventory under variable costing
Which income statement has a higher operating income and by how much? Explain.
Explanation / Answer
Cost C No. of units produced N Cost per unit C/N Ending Inventory units E Ending inventory cost C*E Direct materials used A $111,400 24000 $4.642 650 $3,017.08 Direct labor B 60000 24000 $2.500 650 $1,625.00 Variable manufacturing overhead C $35,000 24000 $1.458 650 $947.92 Fixed manufacturing overhead: 52800 24000 $2.200 650 $1,430.00 $259,200.00 $7,020.00 Variable selling and administrative expenses: $11,000 24000 $0.458 650 Fixed selling and administrative expenses: 13500 No, of units sold (24000-650) 23350 Absorption costing Income statement Sales (23350*117.5) 2743625 Less: Cost of goods manufactured $259,200.00 Less: ending Inventory $7,020.00 Cost of good sold $252,180 Gross profit $2,491,445 Less: Selling and administrative expenses: Variable selling and administrative expenses (23350*1.458) $34,052 Fixed selling and administrative expenses: 13500 Selling and administrative expenses: $47,552 Net operating income $2,443,893 Income statement Sales (23350*117.5) 2743625 Less: Variable Cost of goods manufactured (A+B+C) $206,400.00 Less: ending Inventory (206400/24000*650) 5590 $200,810 Variable selling and administrative expenses (23350*1.458) $34,052 Contribution Margin $2,508,763 Less: Fixed expenses Fixed manufacturing overhead: 52800 Fixed selling and administrative expenses: 13500 $66,300 Net operating income $2,442,463 Gross profit $2,491,445 Contribution margin $2,508,763 Total expenses shown BELOW the GROSS PROFIT line $47,552 Total expense shown BELOW the CONTRIBUTION MARGIN line $66,300 Dollar value of ending inventory under absorption costing $7,020.00 Dollar value of ending inventory under variable costing 5590 Which income statement has a higher operating income and by how much Absorption costing because fixed manufacturing overhead is deferred in ending inventory by $1430
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