Question

The annual data that follows pertain to Goggles 4 Upper U​, a manufacturer of swimming goggles​ (the company had no beginning​ inventory):

Sales price............................................................$45
Variable manufacturing expense per unit..........$20
Sales commission expense per..........................$7
Fixed manufacturing overhead...........................$19,80,000
Fixed operating expenses ..................................$250,000
Number of goggles produced............................220,000
Number of goggles sold.....................................198,000

Requirements
1. Prepare both conventional (absorption costing) and contribution margin (variable costing) income statements for Flannery Water Optics for the year.
2. Which statement shows the higher operating income? Why?
3. The company marketing vice president believes a new sales promotion that costs $165,000 would increase sales to 240,000 goggles. Should the company go ahead with the promotion? Give your reason.

Answer 1

Answer:

Flannery Water Optics

Conventional (Absorption costing) Income Statement for the year.

Sales price..............................$45 * 198,000= $ 8910,000

Variable manufacturing expense per unit.....$20 *220,000 = $ 4400,000

Fixed manufacturing overhead...........................$19,80,000

Gross Profit    $ 2530,000

Fixed operating expenses ..................................$250,000

Sales commission expense per..........................$7 * 220,000= $ 154,0000

Net Income      $ 2126,000

Flannery Water Optics

Contribution margin (Variable costing) Income Statement for the year.

Sales price..............................$45 * 198,000= $ 8910,000

Variable manufacturing expense per unit.....$20 *220,000 = $ 4400,000

Contribution Margin   $ 4510,000

Fixed manufacturing overhead...........................$19,80,000

Fixed operating expenses ..................................$250,000

Sales commission expense per..........................$7  * 220,000= $ 154,0000

Net Income      $ 2126,000

2) Contribution Margin under Variable costing is higher because it does not include fixed overheads.

3) Flannery Water Optics

Conventional (Absorption costing) Income Statement for the year.

Sales price..............................$45 * 240,000= $ 10800,000

Variable manufacturing expense per unit.....$20 *220,000 = $ 4400,000

Fixed manufacturing overhead...........................$19,80,000

Gross Profit    $ 4420,000

Fixed operating expenses ..................................$250,000

Sales commission expense per..........................$7 * 220,000= $ 154,0000

Promotion Expense                                         $ 165,000

Net Income      $ 3851,000

Yes they should consider this promotional campaign as it increases net income by $ 1725,000