Question:
Advance Products, Inc., has just organized a new division to manufacture and sell specially designed tables using select hardwoods for personal computers. The division's monthly costs are shown in the schedule below:
Manufacturing costs:
Variable costs per unit:
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $86
Variable manufacturing overhead . . . . . . . . . . . . . . . . $4
Fixed manufacturing overhead costs (total) . . . . . . . . . . $240,000
Selling and administrative costs:
Variable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15% of sales
Fixed (total) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $160,000
Advance Products regards all of its workers as full-time employees and the company has a longstanding no-layoff policy. Furthermore, production is highly automated. Accordingly, the company includes its labor costs in its fixed manufacturing overhead. The tables sell for $250 each.
During the first month of operations, the following activity was recorded:
Units produced . . . . . . . . . . 4,000
Units sold . . . . . . . . . . . . . . 3,200
Required:
1. Compute the unit product cost under:
a. Absorption costing.
b. Variable costing.
2. Prepare an income statement for the month using absorption costing.
3. Prepare a contribution format income statement for the month using variable costing.
4. Assume that the company must obtain additional financing. As a member of top management, which of the statements that you have prepared in (2) and (3) above would you prefer to take with you as you negotiate with the bank? Why?
5. Reconcile the absorption costing and variable costing net operating income figures in (2) and (3) Above.