1. Prepare a contribution income statement and an absorption income statement. If you are in doubt any cost behavior pattern, decide on the basis of whether the total cost in question will fluctuate substantially over a wide range of volume. Prepare a separate supporting schedule of indirect manufacturing costs subdivided between variable and fixed costs.
2. Suppose that all variable costs fluctuate directly in proportion to sales, and that fixed costs are unaffected over a wide range of sales. What would operating income have been if sales had been $12 million instead of $13 million. Which income statement did you use to help get your answer? Why?
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The solution is prepared from fundamental principle of finance and in the process, all ...