For veer ended December 31, 2006. Firm A produced and sold 12,000 units of produ

Question

For veer ended December 31, 2006. Firm A produced and sold 12,000 units of product. Fixed expenses associated with producing the product totaled $4,000 for the year. A variable cost of $3.20 per unit was incurred to produce the product. Fixed expenses associated with selling the product totaled $2,700 for the year, while fixed costs associated with overall administration totaled $5,000 for the year. A variable cost of $0.40 per unit was incurred for product selling, while a variable cost of $ 0.30 per unit was associated with overall administration. A price of $6.25 per unit was realized on each unit of product sold. Using absorption costing as the basis, please present Operating Income for the year using the Traditional Income Statement format. Now using variable costing as the basis, prepare an income Statement for the year in the Contribution Margin Format. Please determine the Contribution Margin per Unit and the Contribution Margin Ratio.

Explanation / Answer

a. Traditional Income Statement (absorption costing )

b. Income statement on Contribution Margin format

Less: Variable Costs:

c. Contribution Margin per unit = 6.25 - 3.90 = $2.35 per unit

Contribution Margin ratio = 2.35 * 100 / 6.25 = 37.60%

Particulars Amount $ Production cost: Variable cost 12000 * $3.20 38400 Fixed costs 4000 Works costs 42400 Add: Administrative costs: Variable cost 12000 * 0.30 3600 Fixed cost 3000 Cost of production 49000 Add: Selling expenses: Variable cost 4800 Fixed cost 2700 Cost of Goods sold 56500 Sales revenue 12000 * 6.25 75000 Net Operating Income 18500

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