Accents Associates sells only one product, with a current selling price of $130 per unit. Variable costs are 60% of this selling price, and fixed costs are $40,000 per month. Management has decided to reduce the selling price to $125 per unit in an effort to increase sales. Assume that the cost of the product and fixed operating expenses are not changed by this reduction in selling price. At the current selling price of $130 per unit, what dollar volume of sales per month is required for Accents to earn a monthly operating income of $20,000
Answer:
Break-even point (dollars)= $150,000
Explanation:
Giving the following information:
Selling price= $130
Unitary variable cost= 130*0.6= $78
Fixed costs= $40,000
Desired profit= $20,000
To calculate the sales in dollars to reach the desired profit, we need to use the following formula:
Break-even point (dollars)= (fixed costs + desired profit) / contribution margin ratio
Break-even point (dollars)= (20,000 + 40,000) / [(130 - 78) / 130]
Break-even point (dollars)= 60,000 / 0.4
Break-even point (dollars)= $150,000
On January 22, Jefferson County Rocks Inc., a marble contractor, issued for cash 210,000 shares of $30 par common stock at $34, and on February 27, it issued for cash 15,000 shares of preferred stock, $9 par at $12.
Required:
Journalize the entries for January 22 and February 27.
Answer:
Jan. 22
Dr Cash $7,140,000
Cr Common Stock $6,300,000
Cr Paid in capital in excess of par $840,000
Feb. 27
Dr Cash $180,000
Cr Preferred Stock $135,000
Cr Paid-In Capital in Excess of Par-Preferred $45,000
Explanation:
Preparation of the entries for January 22 and February 27.
Jan. 22
Dr Cash $7,140,000
(210,000*$34)
Cr Common Stock $6,300,000
(210,000*$30)
Cr Paid in capital in excess of par $840,000
($7,140,000-$6,300,000)
Feb. 27
Dr Cash $180,000
(15,000*$12)
Cr Preferred Stock $135,000
(15,000*$9)
Cr Paid-In Capital in Excess of Par-Preferred $45,000
($180,000-$135,000)
The following T-account is a summary of the cash account of Alixon Company.
Cash (Summary Form)
Balance, Jan. 1 8,000
Receipts from customers 364,000 Payments for goods 200,000
Dividends on stock investments 6,000 Payments for operating expenses 140,000
Proceeds from sale of equipment 36,000 Interest paid 10,000
Proceeds from issuance of bonds payable 8,000 Taxes paid 300,000
Dividends paid 40,000 Balance, Dec. 31 316,000
Required:
What amount of net cash provided (used) by financing activities should be reported in the statement of cash flows?
Answer and Explanation:
The computation of the amount of net cash provided (used) by financing activities is shown below
Cash flows from financing activities
Proceeds from issuance of bonds payable $300,000
Less: dividend paid -$40,000
Net cash flow provided by financing activities $260,000
The positive amount represent the cash inflow while on the other hand the negative amount represent the cash outflow
explain errors are not detected by a trial balance
Answer:
Errors not detected by a trial balance are:
1. Posting to Wrong Account
2. Error of Amounts in Original Book
3. Compensating Errors
4. Errors of Principle
5. Errors of Omission
Explanation:
The Trial Balance does not provide absolute assurance of ledger account accuracy. It is just an evidence of the postings' arithmetical accuracy. Even though the amount of debits equals the amount of credits, there may be inaccuracies.
A trial balance will not reveal such errors, and they are:
1. Posting to Wrong Account: IF accidentally posted something to the wrong account, but it was on the right side, the Trial Balance agreement will not be affected. For example, if a $200 purchase from John was credited to Joshua instead of John. As a result, Trial Balance will miss such an error.
2. Error of Amounts in Original Book: The Trial Balance will come out appropriately if an invoice for $632 is filed in Sales Book as $623, because the debit and credit have been recorded as $623. The arithmetical precision is there, yet there is a flaw.
3. Compensating Errors: This occurs one mistake is offset by a similar mistake on the other side. These errors are cancelled if one account in the ledger is debited $500 less and another account in the ledger is credited $500 less.
4. Errors of Principle: An errors of Principle is one that breaches the foundations of bookkeeping. Purchases of furniture, for example, are debited to the Purchase Account rather than the Furniture Account; wages paid for the erection of plant are debited to the Wages Account rather than the Plant Account; and the amount spent on a building extension is debited to the Repairs Account rather than the Building Account, and so on. These kind of errors do not alter the total debits and credits, but they do impair the bookkeeping principle.
5. Errors of Omission: There will be no effect on the Trial Balance if a transaction is completely omitted. An error of omission occurs when a transaction is fully unreported in both aspects, or when a transaction is documented in the books of primary entry but never entered in the ledger. For example, if a credit purchase is not recorded in the Purchase Day Book, it will not be posted to both the Purchase Account and the Supplier's Account. This error, on the other hand, will not cause Trial Balance to disagree.
A business owned and run by one person is called a(n)
a business owned and run by one person is called a(n)
sole proprietorship
Qu. 13-54 (Algo) Otool Incorporated is considering using stocks of an old raw material... Otool Incorporated is considering using stocks of an old raw material in a special project. The special project would require all 160 kilograms of the raw material that are in stock and that originally cost the company $1,536 in total. If the company were to buy new supplies of this raw material on the open market, it would cost $7 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of $6.75 per kilogram if it were not used in the special project. The sale of the raw material would involve delivery to the purchaser at a total cost of $79 for all 160 kilograms. What is the relevant cost of the 160 kilograms of the raw material when deciding whether to proceed with the special project
Answer:
Otool Incorporated
The relevant cost of the 160 kilograms of the raw material when deciding whether to proceed with the special project is:
= $1,001.
Explanation:
a) Data and Calculations:
Cost of 160 kilograms of the raw material = $1,536
Cost of new supplies of the raw material = $7 per kilogram
= $1,120 ($7 * 160)
Price at which the raw material could be sold = $6.75
Total = $1,080 ($6.75 * 160)
Delivery cost cost from sale of the raw material = $79
Net revenue to be recovered from the sale = $1,001.
The relevant cost is the lower of the replacement cost or the net realizable value. That the lower of $1,120 or $1,001.
SME Ads Inc. (SME) Steven Monahan owns SME Ads Inc., an advertising agency. At present, the company focuses on advertising only. However, Steven plans to expand the company's focus to include all the major elements of an organization's promotional mix. Steven feels that expanding the focus in such a way will allow the firm to meet customer needs in a more coordinated fashion. Currently, the firm organizes its work according to the media being used. Steven believes this is the most effective way to subdivide advertising. Since television is the most widely used advertising medium, the company spends most of its time on television advertising. SME knows what it takes to get the job done, and it is committed to success. Refer to SME Ads Inc. In developing the advertising campaign for a client, in which of the following steps should SME include the important selling points or features of the client's products?
A) Identifying and analyzing the industry.
B) Defining the advertising objectives.
C) Creating the advertising platform.
D) Determining the advertising appropriation.
E) Developing the media plan.
Answer:
SME Ads Inc.
In developing the advertising campaign for a client,
SME should include the important selling points or features of the client's products in the following step:
A) Identifying and analyzing the industry.
Explanation:
It is at this step that the SWOT analysis is carried out. The client's selling points form part of the client's strengths. Therefore, during the identification and analysis of the industry in which the client plays a role, its selling points or special features must be prominently developed to achieve great advert value for money.
State whether true or false and briefly explain why:
If a business owner is delighted to accept additional orders at the current price, he or she cannot have been a profit-maximizing, perfectly competitive producer. A profit-maximizing, perfectly competitive firm would have been producing such that the multiple choice P > MC, so producing more would mean that the marginal cost increases to match the market price; so this is false. P = AC, so producing more would mean that the average cost would exceed the price reducing profits; so this is true. P = MC, so producing more would mean that the marginal cost would exceed the price reducing profits; so this is true. MR < MC, so producing more would mean that the marginal cost increases to match the market price; so this is false.
Answer:
Stating True or False
P > MC, so producing more would mean that the marginal cost increases to match the market price. FALSE
P = AC, so producing more would mean that the average cost would exceed the price reducing profits. FALSE
P = MC, so producing more would mean that the marginal cost would exceed the price reducing profits. TRUE
MR < MC, so producing more would mean that the marginal cost increases to match the market price. FALSE
Explanation:
All profit-maximizing producers accept a market price (P) that is equal to the marginal cost (MC), i.e. (P = MC). At this point, the market price does not exceed the marginal costs (costs of factors of production). When = P > MC, it shows that the benefits of producing more goods exceed the production costs, to the benefit of the society. However, if P < MC, then the social costs of producing the goods exceed the social benefits, signalling that the economy should produce less.
Video Planet (VP) sells a big screen TV package consisting of a 60-inch HDTV, a universal remote, and on-site installation by VP staff. The installation includes programming the remote to have the TV interface with other parts of the customer's home entertainment system. VP concludes that the TV, remote, and installation service are separate performance obligations. VP sells the 60-inch TV separately for $1,700, sells the remote separately for $100, and offers the installation service separately for $200. The entire package sells for $1,900.
Required: How much revenue would be allocated to the TV, the remote, and the installation service?
Answer:
Video Planet (VP)
The revenue that would be allocated to the TV, the remote, and the installation service:
TV = $1,615
Remote = $95
Installation service = $190
Explanation:
a) Data and Calculations:
Sales price of 60-inch TV = $1,700
Sales price of remote = $100
Installation service = $200
Total sales price, if sold separately = $2,000
Sales price of entire package = $1,900
Revenue allocated to the 3 performance obligations:
TV = $1,700/$2,000 * $1,900 = $1,615
Remote = $100/$2,000 * $1,900 = $95
Installation service = $200/$2,000 * $1,900 = $190
Total revenue allocated = $1,900
Blue Cab Company had 60,000 shares of common stock outstanding on January 1, 2021. On April 1, 2021, the company issued 30,000 shares of common stock. The company had outstanding fully vested incentive stock options for 10,000 shares exercisable at $11 that had not been exercised by its executives. The end-of-year market price of common stock was $23 while the average price for the year was $22. The company reported net income in the amount of $319,915 for 2021. What is the diluted earnings per share (rounded)
Answer:
$3.46
Explanation:
Diluted earnings per share = Earnings attributable to holders of common stock ÷ Weighted Average Number of Common Stocks outstanding
where,
Earnings attributable to holders of common stock = $319,915
and
Weighted Average Number of Common Stocks outstanding
outstanding on January 1, 2021 = 60,000 shares
additional shares (9/ 12 x 30,000) = 22,500 shares
Option stocks = 10,000 shares
Total = 92,500 shares
therefore,
Diluted earnings per share = $319,915 / 92,500 shares = $3.46
Carbon Composite Poles manufactures fishing poles that have a price of $125.00. It has costs of $90.00. A competitor is introducing a new fishing pole that will sell for $110.00. Management believes it must lower the price to $110.00 to compete in the highly cost-conscious fishing pole market. Marketing department believes that the new price will allow Carbon to maintain the current sales level of 200,000 poles per year. Required: a) What is the target cost for the new price if target operating income is 25 % of sales
Answer:
Carbon Composite Poles
The target cost for the new price if target operating income is 25% of sales is:
= $82.50.
Explanation:
a) Data and Calculations:
Current price of fishing poles = $125.00
Cost of production per unit = $90.00
Competitor's price for a new fishing pole = $110.00
Management agreed new price per fishing pole = $110
Current sales level per year = 200,000 poles
Target operating income = 25% of sales
Cost = 100 - 25% = 75%
Cost = $110 * 75%
= $82.50
Check:
25% of $110 = $27.50
Cost = $82.50
Selling price = $110 ($27.50 * $82.50)
Assume the following information: Current spot rate of New Zealand dollar = $.41 Forecasted spot rate of New Zealand dollar 1 year from now = $.45 One-year forward rate of the New Zealand dollar = $.42 Annual interest rate on New Zealand dollars = 8% Annual interest rate on U.S. dollars = 9% Given the information in this question, the return from uncovered interest arbitrage by U.S. investors with $400,000 to invest is _______ A) about 11.97 B) about 10.63 C) about 11.12 D) about 13.27 E) about 18.54
Answer:
B) about 10.63
Explanation:
Calculation to determine what return from uncovered interest arbitrage by U.S. investors with $400,000 to invest is
First step is to calculate the Current Amount of New Zealand dollar
New Zealand dollar=$400,000/$.41
New Zealand dollar=$975,609.76
Second step is to calculate the Increase based on the Annual interest rate on New Zealand dollars
Increase in New Zealand dollars = $975,609.76×(1+.08)
Increase in New Zealand dollars = $975,609.76× (1.08)
Increase in New Zealand dollars=$1,053,658.54
Third step is to calculate the forward rate amount of the New Zealand dollar
Forward rate amount of New Zealand dollar = $1,053,658.54× .42
Forward rate amount of New Zealand dollar= $442,536.63
Now let calculate return from uncovered interest arbitrage
Return = ($442,536.63 –$400,000)/$400,000
Return = $42,536.63/$400,000
Return=0.1063*100
Return= 10.63%
Therefore return from uncovered interest arbitrage by U.S. investors with $400,000 to invest is about 10.63 %
Signet Automobiles Inc. has launched a new sport utility vehicle (SUV). Its advertising firm develops a marketing message and places advertisements in leading newspapers and on social media sites to inform consumers about the new SUV and its various features. In the context of the communication process, Signet Automobiles is the _______.
Answer:
sender
Explanation:
In the communication process, Signet Automobiles is the sender of the message, that is, the element that transmits the message to the receiver.
The communication process is formed by the following elements: sender, channel, message, code and receiver. The main objective of the process is to transmit a message using a code and a communication channel to a receiver. In this case, the receiver is the target audience of the company Signet Automobiles, which will receive the advertising message through the communication channel, which is newspapers and social media sites.
The communication process is essential for every company, the transmission of messages effectively is that it will assist the company in its correct operation in the internal and external environment, and it is an essential tool for the positioning of a company in the market.
A portfolio is worth $902,654 and has a duration of 5.77 years. The futures price for a June Treasury note futures contract is 115 and each contract is for the delivery of bonds with a face value of 100,000. On the delivery date the duration of the cheapest to deliver bond is 4.36 years. To hedge the interest rate risk, how many June T note futures do you have to enter short positions on
Answer:
10.39
Explanation:
How many June T note futures do you have to enter short positions on?
The June T note futures we have to enter short positions on is calculated as:
= Portfolio duration*Portfolio value/(Futures price*Face value/100)*1/Duration of cheapest to deliver bond
= 5.77*$902,654 / (115*1000) * 1/4.36
= 5208313.58/115000*0.2293577981651376
= 10.38754204228161
= 10.39
For the year ended December 31, 2021, Norstar Industries reported net income of $960,000. At January 1, 2021, the company had 1,050,000 common shares outstanding. The following changes in the number of shares occurred during 2021:
Apr. 30 Sold 80,000 shares in a public offering.
May 24 Declared and distributed a 5% stock dividend.
June 1 Issued 90,000 shares as part of the consideration for the purchase of assets from a subsidiary.
Required:
Compute Norstar's earnings per share for the year ended December 31, 2021. (Enter your answers in thousands. Round "EPS" answer to 2 decimal places. Do not round intermediate calculations.)
Answer:
Earning per share for the year ended December 31, 2021 on Norstar's earnings = $0.79 per share
Explanation:
Earning per share is calculated as
Net income reported / Weighted number of outstanding shares
where,
Net income reported is $960,000
And, the weighted number of outstanding share is
For Jan.1
Jan 1 2021 shares × stock dividend
Dividend = 100 + rate = 100 + 0.05 = 1.05
1,050,000 x 1.05=$1, 102,500
For April
April 30 shares × stock dividend× number of months / total number of months in a year
80,000 x 1.0 5 x 8/12(April 30 to December 31 = 8 months)=56,000
For June
June 1 shares × number of months/ total number of months in a year
90,000 x 7/12=56,000
Total weighted number of outstanding shares =$1,102,500+56,000+52,500= $1,211,000
So, the earning per share is
= 960,000 / $1,211,000 shares
= $0.79 per share
Project Droid has a net present value of $45,000 and has an initial investment of $180,000. Project Clone has a net present value of $8,000 and has an initial investment of $30,000. The projects are proposals for increasing revenue and are mutually exclusive. The firm should accept... Only Project Clone should be accepted Only Project Droid should be accepted Neither Project should be accepted Both Project Clone and Project Droid should be accepted
Answer:
Neither Project should be accepted
Explanation:
Given that
The net present value and the initial investment of the project droid is $45,000 and $180,000 respectively
And, the net present value and the initial investment of the project clone is $8,000 and $30,000 respectively
Since the net present value of both the projects are less than their initial investment so both the projects should not be accepted as the net present value is in negative
The unadjusted trial balance at year-end for a company that uses the percent of receivables method to determine its bad debts expense, reports the following selected amounts: Accounts receivable $ 431,000 Debit Allowance for Doubtful Accounts 1,390 Debit Net Sales 2,240,000 Credit All sales are made on credit. Based on past experience, the company estimates 2.5% of ending account receivable to be uncollectible. What adjusting entry should the company make at the end of the current year to record its estimated bad debts expense
Answer:
Bad Debts Expense $9,385 & Allowance for Doubtful Accounts $9,385
Explanation:
Bad debt expense = ($431,000 *2.5%) - $1,390
Bad debt expense = $10,775 - $1,390
Bad debt expense = $9,385
Adjusted Entry
Debit - Bad Debts Expense $9,385
Credit - Allowance for Doubtful Accounts $9,385
Ralph has decided to put $2,400 a year (at the end of each year) into an IRA over his 40 year working life and then retire. What will Ralph have at retirement if the account earns 10 percent compounded annually
Answer:
$1,062,222.13
Explanation:
Calculation to determine What will Ralph have at retirement if the account earns 10 percent compounded annually
Annuity =$2,400
n = 40 years
r = 10%
FVOA=2400*(1+0.1)^40-1/0.1
FVOA=2400∗442.5925557
FVOA=$1,062,222.13
Ralph will have $1,062,223 at retirement
convertible bonds meaning
Answer:
A convertible Bond is a fixed-income corporate debt security that yield interest payments but also can be converted into a predetermined number of common stock or equity shares
Crane Company incurred the following costs for 50000 units: Variable costs $300000 Fixed costs 392000 Crane has received a special order from a foreign company for 2000 units. There is sufficient capacity to fill the order without jeopardizing regular sales. Filling the order will require spending an additional $4000 for shipping. If Crane wants to break even on the order, what should the unit sales price be?
Answer:
see explanation
Explanation:
Use the Fixed Costs, Variable costs and Sales arising from the special order only and follow the steps below :
Step 1 : Determine the Break even level in sales revenue
Break even (sales revenue) = Fixed Costs ÷ Contribution margin ratio
Step 2 : Determine the unit selling price
Unit selling price = Break even (sales revenue) ÷ total units sold
present value of bonds payable; premium moss co. issued $740,000 of four-year, 12% bonds, with interest payable semiannually, at a market (effective) interest rate of 11%. determine the present value of the bonds payable, using the present value tables in exhibit 5 and exhibit 7. round to the nearest dollar. $fill in the blank 1
Answer:
ijiji
Explanation:
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Prepare a Trial Balance The following balances were taken from the general ledger of Howser Corporation as of December 31. All balances are normal
Cash 6000 Accounts receivable 10,800
Accounts payable 6000 Common stock 36000
Equipment 30000 Dividends 2400
Utilities expense 2,000 Administrative expense 8,000
Sales revenue 17,200
Prepare a trial balance Howser Corporation Trial Balanc Dec cember 31.
Answer:
Trial balance
Particulars Debit Credit
Cash $6,000
Account receivable $10,800
Equipment $30,000
Account payable $6,000
Common Stock $36,000
Dividend $2,400
Sales revenue $17,200
Administrative expense $8,000
Utilities expense $2,000
Total $59,200 $59,200
On January 1, 2021, D Corp. granted an employee an option to purchase 6,500 shares of D's $3 par common stock at $19 per share. The options became exercisable on December 31, 2022, after the employee completed two years of service. The option was exercised on January 10, 2023. The market prices of D's stock were as follows: January 1, 2021, $36; December 31, 2022, $57; and January 10, 2023, $46. An option pricing model estimated the value of the options at $8 each on the grant date. For 2021, D should recognize compensation expense of:________
a. $ 0.
b. $26,000.
c. $117,000.
d. $19,500.
Answer:
b. $26,000
Explanation:
Calculation to determine how much D should recognize as compensation expense
Compensation expense =6,500 shares
x $8 per option / 2 years of service
Compensation expense = 52,000 / 2 years of service
Compensation expense= $26,000
Therefore For 2021, D should recognize compensation expense of:$26,000
Mount Company has budgeted the following unit sales: 2019 Units January 8,000 February 10,000 March 9,000 The finished goods units on hand on December 31, 2018, was 1,000 units. It is the company's policy to maintain a finished goods inventory at the end of each month equal to 10% of next month's anticipated sales. Instructions: Prepare a production budget for February of 2019.
Answer:
Production budget for February - Mount Company
Particulars Amount
Budgeted sales units 10,000
Add: Desired ending inventory 900
(10% of following month sale)
Total needs 10,900
Less: Beginning inventory 1,000
Budgeted Production units 9,900
Sunland Company is planning to sell 1000 buckets and produce 980 buckets during March. Each bucket requires 500 grams of plastic and one-half hour of direct labor. Plastic costs $10 per 500 grams and employees of the company are paid $18 per hour. Manufacturing overhead is applied at a rate of 110% of direct labor costs. Sunland has 200 kilos of plastic in beginning inventory and wants to have 300 kilos in ending inventory. How much is the total amount of budgeted direct labor for March?
Answer: $8820
Explanation:
The total amount of budgeted direct labor for March will be calculated thus:
Production in March = 980
Estimated labor hour = 0.5hour
Labor rate per hour = $18
Total amount of budgeted labor hour will be:
= 980 × 0.5 × $18
= $8820
COTB MC Qu. 8-31 (Static) Assume a company is preparing a... Assume a company is preparing a budget for its first two months of operations. During the first and second months it expects credit sales of $50,000 and $60,000, respectively. The company expects to collect 40% of its credit sales in the month of the sale and the remaining 60% in the following month. What amount of accounts receivable would the company report in its balance sheet at the end of the second month
Answer:
$36,000
Explanation:
The computation of the amount of the account receivable that should be reported at the end of the second month is shown below;
= Credit sales of the second month × following month percentage
= $60,000 × 0.60
= $36,000
By multiplying the credit sales of the second month with the following month percentage, the amount of the account receivable could come
Hence, the same would be relevant
What is the purpose of a W-2 form and how is it used to file taxes?
QUESTION 1 Pure Comfort manufactures and sells mattresses with adjustable air chambers. Pure Comfort has been producing and selling approximately 500,000 units per year. Each units sells for $630, and there are no variable selling, general, or administrative costs. The company has been approached by a foreign supplier who wishes to provide the air compressor component for $95 per unit. Total annual manufacturing costs, including air compressors, is as follows: Direct materials $54,000,000 Direct labor 83,000,000 Variable factory overhead 17,000,000 Fixed factory overhead 36,000,000 If Pure Comfort outsources the air compressor, it is expected that direct materials will be reduced by 25%, direct labor by 35%, and variable factory overhead by 30%. There will be no reduction in fixed factory overhead. (a) Calculate the total cost of each option (internal and outsource). Should Pure Comfort outsource the air compressor
The Clean Water Act (CWA) of 1972 did all of the following except _____.
take over the EPA's authority to impose pollution control programs
not permit pollutants to be discharged from pipes or man-made ditches into navigable waters
regulate pollutants discharged into US waters
set water-quality standards
Answer: The Clean Water Act (CWA) of 1972 did all of the following except
take over the EPA's authority to impose pollution control programs.
Answer:
The Clean Water Act (CWA) of 1972 did all of the following except _take over the EPA's authority to impose pollution control programs[held on 1990]____.
Gallatin County Motors Inc. assembles and sells snowmobile engines. The company began operations on July 1 and operated at 100% of capacity during the first month. The following data summarize the results for July: 1 Sales (38,000 units) $9,500,000.00 2 Production costs (44,000 units): 3 Direct materials $4,400,000.00 4 Direct labor 1,760,000.00 5 Variable factory overhead 1,100,000.00 6 Fixed factory overhead 660,000.00 7,920,000.00 7 Selling and administrative expenses: 8 Variable selling and administrative expenses $1,170,000.00 9 Fixed selling and administrative expenses 200,000.00 1,370,000.00 Required: a. Prepare an income statement according to the absorption costing concept\.\* b. Prepare an income statement according to the variable costing concept\.\* c. What is the reason for the difference in the amount of Operating income reported in (a) and (b)
Answer:
a.
income statement according to the absorption costing concept.
Sales $9,500,000.00
Less Cost of Sales ($6,840,000.00)
Gross Profit $2,660,000.00
Less Expenses
Variable selling and administrative expenses ($1,170,000.00)
Fixed selling and administrative expenses ($200,000.00)
Net Income $1,290,000.00
b.
income statement according to the variable costing concept
Sales $9,500,000.00
Less Cost of Sales ($6,270,000.00)
Contribution $3,230,000.00
Less Expenses
Fixed factory overhead ($660,000.00)
Variable selling and administrative expenses ($1,170,000.00)
Fixed selling and administrative expenses ($200,000.00)
Net Income $1,200,000.00
c.
The difference is due to fixed cost included in closing inventory under the absorption costing concept.
Explanation:
Production Cost - Absorption Costing
Direct materials $4,400,000.00
Direct labor $1,760,000.00
Variable factory overhead $1,100,000.00
Fixed factory overhead $660,000.00
Total $7,920,000.00
therefore,
Cost of Sales = 38,000 units/ 44,000 units x $7,920,000.00
= $6,840,000
Production Cost - Variable Costing
Direct materials $4,400,000.00
Direct labor $1,760,000.00
Variable factory overhead $1,100,000.00
Total $7,260,000.00
therefore,
Cost of Sales = 38,000 units/ 44,000 units x $7,260,000.00
= $6,270,000
a. Income Statement according to Absorption Costing Concept:
Sales: $9,500,000.00
Cost of Goods Sold:
Direct Materials: $4,400,000.00
Direct Labor: $1,760,000.00
Variable Factory Overhead: $1,100,000.00
Fixed Factory Overhead: $660,000.00
Total Manufacturing Costs: $7,920,000.00
Gross Profit: $1,580,000.00
Selling and Administrative Expenses:
Variable Selling and Administrative Expenses: $1,170,000.00
Fixed Selling and Administrative Expenses: $200,000.00
Total Selling and Administrative Expenses: $1,370,000.00
Operating Income: $210,000.00
b. Income Statement according to Variable Costing Concept:
Sales: $9,500,000.00
Variable Costs:
Direct Materials: $4,400,000.00
Direct Labor: $1,760,000.00
Variable Factory Overhead: $1,100,000.00
Variable Selling and Administrative Expenses: $1,170,000.00
Total Variable Costs: $8,430,000.00
Contribution Margin: $1,070,000.00
Fixed Costs:
Fixed Factory Overhead: $660,000.00
Fixed Selling and Administrative Expenses: $200,000.00
Total Fixed Costs: $860,000.00
Operating Income: $210,000.00
In absorption costing, fixed manufacturing overhead is treated as a product cost and is included in the cost of goods sold. This means that a portion of fixed overhead is allocated to each unit produced, resulting in higher inventory values and a higher cost of goods sold.
In variable costing, fixed manufacturing overhead is treated as a period cost and is not included in the cost of goods sold. It is instead expensed in the period incurred. This means that fixed overhead is only expensed when it is incurred and is not allocated to units in inventory.
Since the number of units produced (44,000 units) exceeded the number of units sold (38,000 units), the fixed overhead allocated to the 6,000 unsold units under absorption costing contributes to the difference in reported operating income between the two methods. In this case, the absorption costing method reports higher operating income due to the allocation of fixed overhead to units in inventory.
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