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Problem 6-20 Variable and Absorption Costing Unit Product Costs and Income Statements; Explanation of Difference in Net Opera

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Answer #1
1 Under Absorption Costing
a. Unit product cost:
Direct Material $               15
Direct Labor $                  7
Variable Manufacturing overhead $                  4
Total Variable Cost $               26
Fixed Manufacturing overhead ($595000/35000) $               17
Unit product cost $               43
b. Absorption Costing Income Statement
Sales(30000 X $82) $ 24,60,000
Less: Cost of Goods Sold
Beginning Inventory 0
Add: Cost of Goods manufactured (35000 X $43) $ 15,05,000
Goods available for sale $ 15,05,000
Less: Ending Inventory (5000 X $43) $   2,15,000 $ 12,90,000
Gross Margin $ 11,70,000
Less: Selling and Administrative expenses [(30000 X $4) + $562000] $   6,82,000
Net Operating Income $   4,88,000
2 Under Variable Costing
a. Unit product cost:
Direct Material $               15
Direct Labor $                  7
Variable Manufacturing overhead $                  4
Unit product cost $               26
b. Variable Costing Income Statement
Sales(30000 X $82) $ 24,60,000
Less: Variable expenses:
Variable Cost of goods sold:
Beginning Inventory 0
Add: Variable Manufacturing Cost(35000 X $26) $   9,10,000
Goods available for sale $   9,10,000
Less: Ending Inventory (5000 X $26) $   1,30,000
Variable Cost of goods sold $   7,80,000
Add: Variable selling expenses (30000 X $4) $   1,20,000 $   9,00,000
Contribution margin $ 15,60,000
Less: Fixed Expenses:
Fixed Manufacturing overhead $   5,95,000
Fixed Selling and Administrative expenses $   5,62,000 $ 11,57,000
Net operating Income $   4,03,000
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