Problem:
Far North Telecom, Ltd., of Ontario, has organized a new division to manufacture and sell specialty cellular telephones. The division's monthly costs are shown in the table below. Far North Telecom regards all of its workers as full-time employees and the company has a long-standing no layoff policy. Furthermore, production is highly automated. Accordingly, the company includes its labor costs in its fixed manufacturing overhead. The cellular phones sell for $150 each. During September, the first month of operations, the following activity was recorded:12,000 units produced, 10,000 units sold. Comment on the five questions below the table.
Manufacturing costs:
Variable costs per unit:
Direct Materials ...........................................$48
Variable manufacturing overhead................$2
Fixed Manufacturing overhead cost (total) $360,000
Selling and administration costs:
Variable ...................................................12% of sales
Fixed (total) ............................................$470,000
a. Compute the unit product cost under:
i. absorption costing
ii. variable costing
b. Prepare an absorption costing income statement for September
c. Prepare a contribution format income statement for September using variable costing.
d. Assume that the company must obtain additional financing in order to continue operations. As a member of top management, would you prefer to rely n the statement in (b) above or in (3) above when meeting with a group of prospective investors?
e. Reconcile the absorption costing and variable costing net operating incomes in (2) and (3) above.