Sandi Scott obtained a patent on a small electronic device and organized Scott Products, Inc., to produce and sell the device. During the first month of operations, the device was very well received on the market, so Ms. Scott looked forward to a healthy profit. For this reason, she was surprised to see a loss for the month on her income statement. This statement was prepared by her accounting service, which takes great pride in providing its clients with timely financial data. The statement follows:
Scott Products, Inc.
Income Statement
Sales (40,000 units) $200,000
Variable expenses:
Variable cost of goods sold* $80,000
Variable selling and administrative services 30,000 110,000
Contribution margin 90,000
Fixed expenses
Fixed manufacturing overhead 75,000
Fixed selling and administrative expenses 20,000 95,000
Net operating loss $ (5,000)
*Consists of direct materials, direct labor, and variable manufacturing overhead.
Ms. Scott is discouraged over the loss shown for the month, particularly since she had planned to use the statement to encourage investors to purchase stock in the new company. A friend, who is a CPA, insists that the company should be using absorption costing rather than variable costing. He argues that if absorption costing had been used, the company would probably have reported a profit for the month.
Select cost data relating to the product and to the first month of operations follow:
Units produced 50,000
Units sold 40,000
Variable costs per unit:
Direct materials $1.00
Direct labor $0.80
Variable manufacturing overhead $0.20
Variable selling and administrative $0.75
Required:
a) Complete the following:
- Compute the unit product cost under cost absorption costing.
- Redo the company's income statement for the month using absorption costing.
- Reconcile the variable and absorption costing net operating income (loss) figures.
b) Was the CPA correct in suggesting that the company really earned a "profit" for the month?