Variable and Absorption Costing Unit Product Costs and Income Statements.
Maxwell Company manufactures and sells a single product. The following costs were incurred during the company’s first year of operations:
Variable costs per unit: | |
Manufacturing: | |
Direct materials | $18 |
Direct labor | $7 |
Variable manufacturing overhead | $2 |
Variable selling and administrative | $2 |
Fixed costs per year: | |
Fixed manufacturing overhead | $200,000 |
Fixed selling and administrative expenses | $110,000 |
During the year the company produced 20.000 units and sold 16.000 units. The selling price of the company's product is $50 per unit.
Required:
1. Assume that the company uses absorption costing:
a. Compute the unit product cost.
b. Prepare an income statement for the year.
2. Assume that the company uses variable costing:
a. Compute the unit product cost.
b. Prepare an income statement for the year.
3. The company’s controller believes that the company should have set last year’s selling price at $51 instead of $50 per unit. She estimates the company could have sold 15,000 units at a price of $51 per unit, thereby increasing the company's gross margin by $2,000 and its net operating income by $4,000.Assuming the controller's estimates are accurate, do you think the price increase would have been a good idea?
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