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# Denton Company: unit cost under absorption and variable costing; reconcile operating income

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Denton Company Manufactures and sells single products. Cost data for the product are given below

Variable Cost Per Unit:

Direct Material \$7.00
Direct Labor 10.00
Variable Manufactured Overhead 5.00
Variable Selling and Administration 3.00

Total Variable Cost per Unit 25.00

Fixed Cost Per Month

Fixed Manufacturing Overhead 315,000.00
Fixed Selling and Administration 245,000.00

Total Fixed Cost Per Months 560,000.00

The products sells for \$60.00 per unit. Production and sales data for July and August. The first two months of operation are:

Units Produced Units Sold
July 17,500 15,000
August 17,500 20,000

The company's Accounting Department has prepared absorption costing income statements for July and August as presented below:

(see attached file)

Required:

1. Determine the unit product cost under:
A. Absorption costing
B. Variable costing

2. Prepare variable costing income statements for July and August using the contribution approach

3. Reconcile the variable costing and absorption costing net operating income figure

4. The company's Accounting Department has determined the company's break-even point to be 16,000 unit per month. Compute the following

(see attached file)

I am confused, said the president, The accounting people say that our break even point is 16,000 units per month, but we sold only 15,000 units in July, and the income statement is wrong or the break even point is wrong. " Prepare a brief memo for the president, explaining what happened on the July income statement.

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#### Solution Summary

Computations provided for you.

\$2.19

## Denton Company: Absorption Costing

During Denton Company's first two years of operations, the company reported absorption costing net operating income as follows:
Year 1 Year 2
Sales (@ \$63 per unit) \$ 1,197,000 \$ 1,827,000
Cost of goods sold (@ \$39 per unit) 741,000 1,131,000

Gross margin 456,000 696,000
Selling and administrative expenses* 308,000 338,000

Net operating income \$ 148,000 \$ 358,000

* \$3 per unit variable; \$251,000 fixed each year.

The company's \$39 unit product cost is computed as follows:
Direct materials \$ 7
Direct labor 11
Variable manufacturing overhead 2
Fixed manufacturing overhead (\$456,000 ÷ 24,000 units) 19

Absorption costing unit product cost \$ 39

Production and cost data for the two years are given below:
Year 1 Year 2
Units produced 24,000 24,000
Units sold 19,000 29,000

Required:
1. Prepare a variable costing contribution format income statement for each year.
2. Reconcile the absorption costing and variable costing net operating income figures for each year.

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