Question

Variable and Absorption Costing
Summarized data for 2019 (the first year of operations) for Gorman Products, Inc., are as follows:

Sales (70,000 units)					$2,800,000
Production costs (80,000 units)
Direct material					880,000
Direct labor					720,000
Manufacturing overhead:
Variable					544,000
Fixed					320,000
Operating expenses:
Variable					175,000
Fixed					240,000
Depreciation on equipment					60,000
Real estate taxes					18,000
Personal property taxes (inventory & equipment)					28,800
Personnel department expenses					30,000

a. Prepare an income statement based on full absorption costing.
Only use a negative sign with your answer for net income (loss), if the answer represents a net loss. Otherwise, do not use negative signs with any answers. Round answers to the nearest whole number, when applicable.

Absorption Costing Income Statement
Sales						Answer
Cost of Goods Sold:
Beginning Inventory					Answer
Direct materials					Answer
Direct labor					Answer
AnswerGross profitOperating expensesVariable manufacturing overheadManufacturing overheadContribution margin					Answer
Less: Ending Inventory					Answer
Cost of Goods Sold						Answer
AnswerGross profitOperating expensesVariable manufacturing overheadManufacturing overheadContribution margin						Answer
AnswerGross profitOperating expensesVariable manufacturing overheadManufacturing overheadContribution margin						Answer
Net Income (Loss)						Answer

b. Prepare an income statement based on variable costing.
Only use a negative sign with your answer for net income (loss), if the answer represents a net loss. Otherwise, do not use negative signs with any answers. Round answers to the nearest whole number, when applicable.

Variable Costing Income Statement
Sales						Answer
Variable cost of Goods Sold:
Beginning Inventory					Answer
Direct materials					Answer
Direct labor					Answer
AnswerGross profitVariable manufacturing overheadManufacturing overheadVariable operating expensesContribution margin					Answer
Less: Ending Inventory					Answer
Variable cost of goods sold						Answer
AnswerGross profitVariable manufacturing overheadManufacturing overheadVariable operating expensesContribution margin						Answer
AnswerGross profitVariable manufacturing overheadManufacturing overheadVariable operating expensesContribution margin						Answer
Fixed costs:
AnswerGross profitVariable manufacturing overheadManufacturing overheadVariable operating expensesContribution margin					Answer
Operating expenses					Answer
Total Fixed Cost						Answer
Net Income (Loss)						Answer

c. Assume that you must decide quickly whether to accept a special one-time order for 1,000 units for $25 per unit.

Which income statement presents the most relevant data? Answerabsorption costingvariable costing

Determine the apparent profit or loss on the special order based solely on these data.
Use a negative sign with your answer if the special order creates an apparent loss. Round answer to the nearest whole number.

$Answer

  

Answer 1

a.

Absorption Costing Income Statement
Sales		$     2,800,000
Cost of Goods Sold:
Beginning Inventory	$             -
Direct materials	$     880,000
Direct labor	$     720,000
Manufacturing overhead	$     864,000		=544000+320000
Less: Ending Inventory	$     308,000		=(880000+720000+864000)/80000)*10000
Cost of Goods Sold		$     2,156,000
Gross Profit		$        644,000
Operating Expenses		$        551,800	=175000+240000+60000+18000+28800+30000
Net Income (Loss)		$         92,200

b.

Variable Costing Income Statement
Sales		$     2,800,000
Variable cost of Goods Sold:
Beginning Inventory	$             -
Direct materials	$     880,000
Direct labor	$     720,000
Variable manufacturing overhead	$     544,000
Less: Ending Inventory	$     268,000		=(880000+720000+544000)/80000)*10000
Variable cost of goods sold		$     1,876,000
Variable operating expenses		$        175,000
Contribution margin		$        749,000
Fixed costs:
Manufacturing overhead	$     320,000
Operating expenses & Other Expenses	$     376,800		=240000+60000+18000+28800+30000
Total Fixed Cost		$        696,800
Net Income (Loss)		$         52,200

c. Variable Cost per unit = (1876000+175000) / 70000 = $29.30 per unit
Since variable cost per unit is greater than sale price for special order, order should not be accepted.

Variable costing income statement presents most relevant data, since fixed cost remains same irrespective of number of units sold.

Apparent loss on special order = (25-29.3) x 1000 = -$4300