Income statement using the contribution approach


Question 1. Smith Company has been producing and selling 100,000 units per year. They have excess capacity. The following budget was prepared for the next year:

Selling price per unit       $12.50
Variable cost per unit:
Direct materials               $5.00
Direct labor                       3.00
Overhead                          1.00
Selling and administrative     .25

Fixed costs in total:

Overhead                         $80,000
Selling and administrative    35,000

Required:

a. Prepare an income statement using the contribution approach.

b. Prepare an income statement using the absorption approach.

Question 2. Carter Company, a manufacturer of windows, has prepared the following list of accounts and their balances:

Advertising    $7,200
Assemblers' wages    16,840
Depreciation of machinery    1,840
Factory utilities    11,120
Lathe operators' wages    13,280
Machinery repairs    4,520
Corporate office salaries    22,760
Purchases of glue    320
Purchases of nails    160
Purchases of oak    50,000
Purchases of pine 19,800
Supervisors' salaries    38,280

There were no beginning or ending inventories. Calculate the following:

a. Direct materials used

b. Direct labor

c. Factory overhead

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Finance Basics: Income statement using the contribution approach
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