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.
This solution presents a contribution of Herrestad Company's contribution margin income statement and absorption income statement. Additionally, the solution examines why net income under the absorption costing is higher than net income under marginal costing, and explains why this happens. Lastly, the solution shows the company's break-even point in units under the original cost structure, and when the cost of direct materials increases from $100 to $130.