Question

VERY VERY IMPORTANT -- PLEASE READ!!!

DO NOT PROVIDE ANSWERS IN TABLE FORM -- NUMERIC SENTENCES ARE NEEDED UNDER A AND B -- NO CHARTS!!!!!!!!!!!!!

ANSWERS TO A & B MUST BE IN NUMBER SENTENCE FORM WITH SUPPORTING CALCULATIONS. ANSWERS CANNOT BE PRESENTED IN TABLE FORM.

The Quality Corporation produces and sells a single product. The following data refers to the year just completed:

List of Account Titles
Beginning inventory		0
Units produced		9,000
Units sold		7,000
Selling price per unit	$	47
Selling and administrative expenses:
Variable Cost per unit	$	4
Fixed Cost per year	$	58,000
Manufacturing costs:
Direct materials cost per unit	$	10
Direct labor cost per unit	$	6
Variable manufacturing overhead cost per unit	$	5
Fixed manufacturing overhead per year	$	90,000

a. If the managers use the variable costing approach to prepare an income statement, what is the dollar amount for the contribution margin account that would be reported on this type of income statement?  Show all detailed supporting calculations that were used to determine the final answer. Answer is to be in numeric sentence form, not done using a table/chart. NO CHART!!!

b. If the managers use the absorption (traditional financial) costing approach to prepare an income statement, what is the dollar amount for the gross margin account that would be reported on this type of income statement? Show all detailed supporting calculations that were used to determine the final answer. Answer is to be in numeric sentence form, not done using a table/chart. NO CHART!!!!!

Answer 1

Solution a:

Selling price per unit = $47

Variable cost per unit = Variable manufacturing cost per unit + Variable selling expenses per unit

= ($10 + $6 + $5) + $4 = $25 per unit

Contribution margin per unit = Selling price per unit - variable cost per unit = $47 - $25 = $22 per unit

Nos of unit sold = 7000

Contribution margin to be reported in income statement = 7000 * $22 = $154,000

Solution 2:

Fixed manufacturing per unit of production = Total fixed manufacturing overhead / Nos of unit produced

= $90,000 / 9000 = $10 per unit

Unit product cost under absorption costing = variable manufacturing cost per unit + Fixed manufacturing cost per unit

= ($10 + $6 + $5) + $10 = $31 per unit

Total units sold = 7000 units

Sales revenue = 7000 * $47 = $329,000

Cost of goods sold = 7000 * $31 = $217,000

Gross Margin = Sales revenue - COGS = $329,000 - $217,000 = $112,000