Task:
The following information is taken from the records of the Kingland Manufacturing Company for the year ending December 31, 2009.
There were no beginning or ending inventories.
Sales $13,000,000 Long term factory $100,000
Sales Commissions 500,000
Advertising 400,000 Factory Sup. Salary 30,000
Shipping expenses 300,000 Factory Sup. Salaries 100,000
Administrative exe salaries 100,000 Direct materials used 4,000,000
Administrative cler. salaries (variable) 400,000 Direct Labor 2,000,000
Fire insurance factory equip 2,000 Cutting bits used 60,000
Property taxes on factory equip 30,000 Factory methods research 40,000
Abrasives for machining 100,000
Indirect labor 800,000
Depreciation on factory 400,000
equipment
Problem 1. Prepare a contribution income statement and an absorption income statement. If you are in doubt any cost behavior pattern, decide on the basis of whether the total cost in question will fluctuate substantially over a wide range of volume. Prepare a separate supporting schedule of indirect manufacturing costs subdivided between variable and fixed costs.
Problem 2. Suppose that all variable costs fluctuate directly in proportion to sales, and that fixed costs are unaffected over a wide range of sales. What would operating income have been if sales had been $12 million instead of $13 million. Which income statement did you use to help get your answer? Why?