P7-3B. Variable And Absorption Costing-Service Company Rocky\'s Automotive speci

Question

P7-3B. Variable And Absorption Costing-Service Company Rocky's Automotive specializes in per- forming automobile safety checks. After the company's first year of operations, its accountant pre- pared the following summarized data report for the safety checks for 2016: Production costs (7,010 safety checks): Shop overhead: . . . . 112,160 Fixed Operating expenses: Fixed Required a. Prepare an income statement based on full absorption costing b. Prepare an income statement based on variable costing. c. Assume that you must decide quickly whether to accept a special one-time order for 20 safety checks on local police cars for $80 per safety check. Determine the apparent profit or loss on the special order based solely on these data.

Explanation / Answer

Solution a:

Solution b:

Solution c:

Variable cost per unit of safety check = $89, therefore it is not healthy to accept special one time order for 20 safety check on local police car for $80 per safety check as it will not cover variable cost of the company.

Profit (Loss) on special order = ($80 - $89) * 20 = -$180

Rockey Automobiles - Absorption costing income statement Particulars Amount Sales $700,000.00 Cost of Goods Sold: Direct labor $490,700.00 Variable Shop Overhead $112,160.00 Fixed Shop Overhead $70,100.00 Cost of Production $672,960.00 Less: Ending inventoy ($672,960/7010*10) $960.00 Cost of Goods Sold $672,000.00 Gross Profit $28,000.00 Opearting Expenses: Variable $21,030.00 Fixed $16,000.00 Net Operating Income -$9,030.00

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