Variable and absorption costing income statements [25—30 minutes] The 2010 data that fo...

Variable and absorption costing income statements [25—30 minutes]

The 2010 data that follow pertain to Swim Clearly, a manufacturer of swimming goggles. (Swim Clearly had no beginning inventories in January 2010.)

Requirements

1. Prepare both conventional (absorption costing) and contribution margin (variable costing) income statements for Swim Clearly for the year ended December 31, 2010.

2. Which statement shows the higher operating income? Why?

3. Swim Clearly’s marketing vice president believes a new sales promotion that costs $150,000 would increase sales to 200,000 goggles. Should the company go ahead with the promotion? Give your reasoning.