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    Explain the amount by which absorption costing income would differ from variable costing income. (Compute difference without computing absorption costing income

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    Question 2

    Jay Manufacturing's sales slumped badly in 2006 due to so many people purchasing gifts online. The company's income statement showed the following results from selling 500,000 units of product: Net sales, $2,000,000; total costs and expenses, $2,500,000; and net loss of $500,000. Costs and expenses consisted of the following:

    Total Variable Fixed
    Cost of goods sold $2,000,000 $1,300,000 $700,000
    Selling expenses 200,000 50,000 150,000
    Administrative expenses 300,000 150,000 150,000
    $2,500,000 $1,500,000 $1,000,000

    Management is considering the following alternative for 2007:
    Purchase new automated equipment that will change the proportion between variable and fixed costs to 40% variable and 60% fixed.

    A. Determine the selling price per unit.
    B. Compute the break-even point in dollars for 2006.
    C. Compute the break-even point in dollars under the alternative course of action for 2007.
    D. Which course of action do you recommend? Justify your answer.

    Question 3

    Fresh Air Products manufactures and sells a variety of camping products. Recently the company opened a new plant to manufacture a deluxe portable cooking unit. Cost and sales data for the first month of operations are shown below:

    Manufacturing Costs
    Fixed overhead $ 108,000
    Variable overhead $ 3 per unit
    Direct labor $ 12 per unit
    Direct material $ 30 per unit

    Beginning inventory 0 units
    Units produced 12,000
    Units sold 10,000

    Selling and administrative costs
    Fixed $ 200,000
    Variable $ 4 per unit sold

    The portable cooking unit sells for $110. Management is interested in the opening month's results and has asked for an income statement.
    Assume the company uses variable costing.
    a. Calculate the production cost per unit, and prepare an income statement for the month of June 2005.
    b. Explain the amount by which absorption costing income would differ from variable costing income. (Compute difference without computing absorption costing income

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    Solution Preview

    First month
    Sales (units) 10,000
    Production 12,000
    Closing Inventory 2,000
    Beginning inventory 0

    Data per unit (variable)
    Price 110
    Direct Materials 30
    Direct Labor 12
    Selling Costs 4

    Period costs (fixed)
    Manufacturing overhead 108,000
    Selling and Administrative 200,000

    (Variable Costing)

    Income Statement
    For the Month Ending

    First month

    Sales 1100000
    Variable expenses
    Variable cost of goods sold
    Inventory, January 1 0
    Variable manufacturing 504000
    Cost of goods available 504000
    for sale
    Inventory, December 31 84000
    Variable cost of goods 420000
    Variable selling expenses 40000
    Total variable expenses 460000
    Contribution margin 640000
    Fixed expenses
    Manufacturing overhead 108,000
    Administrative 200,000
    Total fixed expenses 308,000
    Income from operations $332,000

    (Absorption ...

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