Question

i Requirements 1. Prepare both conventional (absorption costing) and contribution margin (variable costing) income statements for Carl's Crazy Eyewear for the year ended December 31, 2018. 2. Which statement shows the higher operating income? Why? 3. Carl's Crazy Eyewear's marketing vice president believes a new sales promotion that costs $90,000 would increase sales to 170,000 goggles. Should the company go ahead with the promotion? Give your reasoning. Print Done

Answer 1

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Carl's Crazy
Answer 1
Data Given
No. of units produced	200,000.00	Per Unit
Sales		32.00
Variable manufacturing cost per unit		16.00
Sales commission per unit		1.00
Fixed manufacturing Overhead	600,000.00	3.00	Fixed manufacturing Overhead/ Units Produced
Fixed selling and admin costs	230,000.00
Goggles produced	200,000.00
Goggles sold	155,000.00
Absorption Costing Income Statement
No. of units produced	200,000.00
No. of units sold	155,000.00
Closing Stock	45,000.00
Sales	4,960,000.00	Per unit price multiplied by number of units sold
Cost of Goods sold
Variable manufacturing cost per unit	2,480,000.00	Per unit cost multiplied by number of units sold
Fixed manufacturing Overhead	465,000.00	Per unit cost multiplied by number of units sold
Cost of Goods sold	2,945,000.00
Gross Profit	2,015,000.00
Operating Expense
Sales commission per unit	155,000.00	Per unit cost multiplied by number of units sold
Fixed selling and admin costs	230,000.00
Operating Expense	385,000.00
Income from Operations	1,630,000.00
Value of Closing Stock	855,000.00	Closing stocks unit*per unit cost of(Variable manufacturing cost+ Fixed manufacturing Overhead)
Contribution Margin Statement
No. of units produced	200,000.00
No. of units sold	155,000.00
Closing Stock	45,000.00
Sales	4,960,000.00	Per unit price multiplied by number of units sold
Variable Cost of Goods sold
Variable manufacturing cost per unit	2,480,000.00	Per unit cost multiplied by number of units sold
Sales commission per unit	155,000.00	Per unit cost multiplied by number of units sold
Contribution	2,325,000.00
Fixed manufacturing Overhead	600,000.00	Per unit cost multiplied by number of units sold
Fixed selling and admin costs	230,000.00	Per unit cost multiplied by number of units sold
Income from Operations	1,495,000.00
Answer 2
Income form operations under absorption costing is higher and it is caused by the allocation of $135,000 fixed manufacturing overhead to closing Inventory while in contribution statement total fixed cost is deducted and nothing is allocated to closing stock.
No. of units produced	200,000.00
No. of units sold	155,000.00
Closing Stock	45,000.00
Fixed manufacturing Overhead per unit	3.00
Fixed manufacturing Overhead in closing stock	135,000.00
Answer 3
Absorption Costing Income Statement
No. of units produced	200,000.00
No. of units sold	170,000.00
Closing Stock	30,000.00
Sales	5,440,000.00	Per unit price multiplied by number of units sold
Cost of Goods sold
Variable manufacturing cost per unit	2,720,000.00	Per unit cost multiplied by number of units sold
Fixed manufacturing Overhead	510,000.00	Per unit cost multiplied by number of units sold
Cost of Goods sold	3,230,000.00
Gross Profit	2,210,000.00
Operating Expense
Sales commission per unit	170,000.00	Per unit cost multiplied by number of units sold
Fixed selling and admin costs	230,000.00
Advertising Expense	90,000.00
Operating Expense	490,000.00
Income from Operations	1,720,000.00
Previous Income from Operations	1,630,000.00
Loss	90,000.00
If advertising expense is incurred Income from Operations will increase by $ 90,000 so proposal should be accepted.