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Innovation Garments' Contribution Margin & Horizon's Quality Absorption

Assignment A

Innovation Garments
Income Statement, July 2005

Actual Budget

Sales in Units 11,000 12,000

Sales Revenue $114,400 $120,000
Cost of Good Sold:
Variable manufacturing costs $62,700 $66,000
Fixed manufacturing costs $25,000 $24,100
Cost of Good Sold $87,700 $90,100
Gross Margin $26,700 $29,900

Operating Costs:
Variable marketing costs $5,720 $6,000
Fixed marketing & administrative costs $18,280 $17,900
Total Operating Costs $24,000 $23,900
Operating Income $2,700 $6,000

You have recently been employed as the first management accountant of Innovation Garments and the financial accountant gave you the above income statement and said that he is unhappy the company had not achieved its budget for July 2005. You are not satisfied with the income statement format and the internal budget used to compare performance.


Prepare a new income statement to emphasize contribution margin and also provide your written comments and recommendations. Your report should include the causes for any contribution margin variances

Assignment B

1) Horizon Quality has the capacity to produce 25,000 leather belts, but us produced and sold only 15,000 leather belts in 2003 because of a low demand for its product. The unit selling price is $25. Direct materials costs $2 per unit and direct manufacturing wages $3 per unit. Sales commission is $1 per unit. Fixed Manufacturing overhead is $150,000; fixed marketing and distribution costs are $50,000 and general and administrative costs are $75,000.

In order to improve the company's performance a new manager was hired and it was agreed to pay her a bonus based in a percentage of profits. The manager produced 20,000 leather belts in 2004 of which the firm again sold only 15,000. Selling price and all costs remained the same in 2004.


Prepare financial statements for 2003 and 2004 under absorption and variable costing.
Analyze these statements and prepare a report for senior management with your comments and recommendations which should include the action(s) management need to take to avoid overproduction. You should also recommend the costing method (absorption or variable) management should use to determine the bonus, and the reason for selecting this method.

Solution Summary

In a handwritten solution, the response clearly explains the problems.