Sales price $46 Variable manufacturing expense per unit $17 Sales commission exp
ID: 353683 • Letter: S
Question
Sales price
$46
Variable manufacturing expense per unit
$17
Sales commission expense per unit
$11
Fixed manufacturing overhead
$2,990,000
Fixed operating expenses
$265,000
Number of goggles produced
230,000
Number of goggles sold
215,000
e annual data that follows pertain to
ShadyShady,
a manufacturer of swimming goggles (the company had no beginning inventory):
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(Click
the icon to view the data.)
Requirements
1.
Prepare both conventional (absorption costing) and contribution margin (variable costing) income statements for
ShadyShady
for the year.
2.
Which statement shows the higher operating income? Why?
3.
The company marketing vice president believes a new sales promotion that costs
$ 150 comma 000$150,000
would increase sales to
230 comma 000230,000
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
ShadyShady
for the year. Begin with the conventional (absorption costing) income statement.
Sales price
$46
Variable manufacturing expense per unit
$17
Sales commission expense per unit
$11
Fixed manufacturing overhead
$2,990,000
Fixed operating expenses
$265,000
Number of goggles produced
230,000
Number of goggles sold
215,000
e annual data that follows pertain to
ShadyShady,
a manufacturer of swimming goggles (the company had no beginning inventory):
LOADING...
(Click
the icon to view the data.)
Requirements
1.
Prepare both conventional (absorption costing) and contribution margin (variable costing) income statements for
ShadyShady
for the year.
2.
Which statement shows the higher operating income? Why?
3.
The company marketing vice president believes a new sales promotion that costs
$ 150 comma 000$150,000
would increase sales to
230 comma 000230,000
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
ShadyShady
for the year. Begin with the conventional (absorption costing) income statement.
Explanation / Answer
Part A.
Conventional (Absorption Costing) Income Statement
Sales Revenue
9890000
Less: Cost of goods sold
(3655000)
Gross Profit
6235000
Less: Operating Expenses
Sales Commissions
$2,365,000
Fixed Operating Expenses
$265,000
($2,630,000)
Operating Income
$3,605,000
Contribution margin (Variable Costing) Income Statement
Sales Revenue
9890000
Less: Variable Cost
Variable cost of goods sold
$3,655,000
Variable operating expense (Sales Commission)
$2,365,000
($6,020,000)
Contribution
$3,870,000
Less: Fixed Expenses
Fixed manuf. Overhead
$2,990,000
Fixed operating expense
$265,000
($3,255,000)
Operating Income
$615,000
b.
Absorption costing operating income is higher than variable costing operating income. This is because absorption costing defers $2,990,000 of fixed manufacturing overhead as an asset in ending inventory. In contrast, variable costing expenses all of the fixed manufacturing overhead during the year is considered. Thus, the income by variable costing method is less than $2,990,000 during the year.
Sales Revenue
9890000
Less: Cost of goods sold
(3655000)
Gross Profit
6235000
Less: Operating Expenses
Sales Commissions
$2,365,000
Fixed Operating Expenses
$265,000
($2,630,000)
Operating Income
$3,605,000
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