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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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