Question: The Independence Corporation had the following manufacturing information for the year 2006 [in thousands of dollars].
Starting and ending inventories none
Direct material used $400
Direct labor 330
Supplies 20
Utilities-variable portion 40
Depreciation 200
Property taxes 20
Supervisory salaries 50
Utilities-fixed portion 12
Indirect labor-variable portion 90
Indirect labor-fixed portion 40
Selling expenses were $300,000 [including $60,000 that was variable] & general administrative expenses were $144,000 [including $23,000 that was variable]. Sales were $1.8 million.
Direct labor & supplies are regarded as variable costs.
[A] Make two (2) income statements, one using the contribution approach & one using the absorption approach.
[B] Assume that all variable costs fluctuate directly in proportion to sales & that fixed costs are unaffected over a very wide range of sales. Estimate, what would operating income have been if sales had been $2.0 million instead of $1.8 million? Which income statement did you use to obtain your answer? Explain your answer.