Problem: Prepare a contribution margin (behavioral, variable) income statement for Herrestad Company, compare net operating profit from a contribution margin income statement with net income from an absorption income statement, and explain why this difference happens. Prepare a second version assuming the selling price per unit increases to $270 per unit.
Use the original information to:
• Determine the number of units the company must sell to break even for the year?
• Compute break even assuming direct materials cost increase from $100 to $130, but all information remains the same.
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Product information
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Beginning inventory
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0
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Units produced
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10,000
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Units sold
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8,000
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Selling price per unit
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$250
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Variable costs per unit
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Direct material
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100
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Direct labor
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50
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Variable overhead
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30
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Variable selling and administrative
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10
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Fixed costs
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Fixed manufacturing overhead
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200,000
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Fixed selling and administrative
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100,000
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Herrestad Company
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Absorption Income Statement
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For the period ending Dec. 31, 2011
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Sales
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$2,000,000
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Cost of goods sold
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1,600,000
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Gross profit (margin)
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$400,000
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Selling and administrative expenses
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180,000
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Net income
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$220,000
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