Purchase Solution

E-Companies - Traditional (Absorption) and Variable Costing

Not what you're looking for?

Ask Custom Question

The E-Company manufactures trendy, high-quality moderately priced watches that it sells on the Internet. As the company's senior financial analyst, you are asked to analyze the overall profitability fo the current year. The CFO has heard that there are two different approaches for preparing income statment.s You are asked to show the CFO both approaches and explain the advantages or disadvantes of each method. The following data are for the year ended December 31, 2009:
Production capacity is 400,000 units
Beginning inventory, January 1: 85,000 units
Ending inventory, December 31: 55,000 units
Sales for the year are: 345,000 units
Selling price (to distributor) $19.00 per unit
Variable manufacturing cost per unit, including direct materials of $3.50 and direct labor of $1.40
Variable operating/selling cost per unit sold $1.20
Fixed manufacturing overhead $1,600,000
Fixed sellling & administrative expenses $1,200,000
Assume costs per unit are the same for units in beginning inventory and units produced during the year. Also, assume the prices and unit costs did not change during the year.
Requirement:
1. Prepare income statements under variable (contribution margin) and traditional (absorption) costing for the year ended December 31, 2008.
2. What are E's contribution margin ratio, gross profit ratio and operating (net) income ratios?
3. Explain the difference and reconcile operating income for the two methods.
4. If E sells 10,000 additional units, how much better off is the company financially? Which income method did you use? Please explain and show your computations.
5. Which costing method would you recommend to the CFO? Why?

Purchase this Solution
Solution Summary

The solution contains detailed answers along with calculations to all the questions.

Purchase this Solution
Free BrainMass Quizzes
Marketing Research and Forecasting

The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.

Understanding the Accounting Equation

These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.

Business Ethics Awareness Strategy

This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.

Basic Social Media Concepts

The quiz will test your knowledge on basic social media concepts.

Understanding Management

This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.

View More Free Quizzes
Related BrainMass Solutions

  • Alternative Forms of Costing

    My past papers This solution looks at each alternative form of costing: activity based costing, traditional product costing, variable costing, and absorption costing.

  • Income statements using variable and absorption costing

    223635 E-Company: prepare income statements using variable and absorption costing The E-Company The E-Company manufactures trendy, high-quality moderately priced watches that it sells on the Internet.

  • Tiny Tim's Bookcases variable full absorption costing

    Part d: Prepare a full (absorption) costing income statement for 2010. No statement heading is required. Part e: Compute the unit product cost under full (absorption) costing for 2011.

  • Analyzing overall profitability for E-Company's

    The solution analyze overall profitability for E-Company's and prepare income statements under variable (contribution margin) and traditional (absorption) costing for the year It manufacture of moderately prices watches.

  • Keller Best Manufacturing: Total Contribution Margin

    Explain the differences between the traditional and the contribution margin income statements. Under (traditional absorption) costing, all normal manufacturing costs are considered product costs.

  • Analyze income statements using contribution margin

    Also, assume the prices and unit costs did not change during the year. Requirement: Prepare income statements under variable (contribution margin) and traditional (absorption) costing for the year ended December 31, 2008.

  • Return on investment and variable costings

    variable and nonmanufacturing 14) _____ is another term for variable costing. A. Full costing B. Direct costing C. Traditional costing D. Absorption costing 1) Company A's revenues are $300 on invested capital of $240.

  • Analyzing the difference between Variable Costing vs. Absorption Costing

    On the other side, manufacturing companies use absorption costing method to show their costs and profit analysis. In addition, it is necessary for companies to follow absorption costing, which follow the GAAP and IFRS (Mowen, 2012).

  • Variable and absorption costing

    Also, assume the prices and unit costs did not change during the year. Requirement: Prepare income statements under variable (contribution margin) and traditional (absorption) costing for the year ended December 31, 20XX.

View More Related Solutions