The annual data that follows pertain to See It, a manufacturer of swimming goggl
ID: 2416043 • Letter: T
Question
The annual data that follows pertain to See It, a manufacturer of swimming goggles (the company had no beginning inventories): Requirements Prepare both conventional (absorption costing) and contribution margin (variable costing) income statements for See It for the year. Which statement shows the higher operating income? Why? 3. The company marketing vice president believes a new sales promotion that costs $140,000 would increase sales to 230,000 goggles. Should the company go ahead with the promotion? Give your reason. Requirement 1. Prepare both conventional (absorption costing) and contribution margin (variable costing) income statements for See It for the year. Begin with the conventional (absorption costing) income statement.Explanation / Answer
Answer1. Prepare Absorption costing and Variable Costing Income Statement.
Step-1 Computation o Unit Cost under Absorption costing and Variable Costing.
Fixed Manufacturing Cost/Unit
($2990,000/230,000 units produced)
Step-2 Calculate units in ending Inventory
Step-3 Income Statement using Absorption Costing
Step-4 Income Statement using Variable Costing
Answer 2 Net Operating Income under Absorption Costing is $234,000($381,000-$147,000) higher than the Net Operating Income under Variable Costing .
This difference is because of fixed manufacturing overhead that becomes the part of ending inventory under absorption costing system. The ending inventory absorbs a portion of fixed manufacturing overhead and reduces the burden of the current period. In this way a portion of fixed cost that relates to the current period is transferred to the next period.
Under variable costing, the fixed manufacturing overhead cost is not included in the product cost but charged to the income statement of the relevant period in its entirety. Therefore no portion of fixed cost is absorbed by the ending inventory.
In our example, the net operating income is higher under absorption costing than variable costing because closing inventory is higher than the opening inventory.
Answer 3. Incremental Analysis
Increase in contribution$288,000 ($16*18000 increased unit) less Increased fixed cost $140,000 =$148,000
So the proposal should be accepted.
Patricualrs Absorption $ Variable $ Variable Manufacturing Cost/Unit 19 19Fixed Manufacturing Cost/Unit
($2990,000/230,000 units produced)
13 0 Total Unit Cost 32 19Related Questions
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