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W Produce Anything, Inc., a small manufacturing company, commenced operations at
the beginning of the year. The following income statement for the first quarter was
We Produce Anything, Inc.
Income Statement
For The Quarter Ended March 31
Sales (46,000 units)
\$2,300,000
Variable expenses
Variable cost of goods sold
910,800
368,000
1,278,800
Contribution Margin
1,021,200
Fixed expenses
600,000
431,200
1,031,200
Net Operating Loss
\$(10,000)
Management is discouraged about the loss. MBA graduate #2 insists that the company
should be using absorption costing instead of variable costing. She (or he) states that, if
absorption costing had been used, the company would have reported a profit for the
quarter.
For the first quarter, the company is producing only one product. Production and cost
data relating to that product for the first quarter is:
Units produced
50,000
Units sold
46,000
Variable costs per unit
Direct materials
\$4.20
Direct labor
14.40
1.20
8.00
Required:
1a] Compute the unit cost under absorption costing.
b] Redo the company’s income statement for the quarter using absorption costing.
c] Reconcile the variable and absorption costing net operating income (loss) figures.
2] Was the MBA graduate #2 correct in stating that the company really earned a profit
3] During the second quarter of operations, the company again produced 50,000 units
but sold 54,000 units. (Assume no change in fixed costs.)
a) Prepare a contribution format income statement for the second quarter using
variable costing.

b) Prepare an income statement for the second quarter using absorption costing.
c) Reconcile the variable and absorption costing net operating incomes.
The S Corporation makes two types of skis—Better and Great. The data for the two
product lines is:
Better
Great
Selling price per unit

210

150

Direct materials per unit (\$)
110
80
Direct labor per unit (\$)
30
15
Direct labor-hours per unit
2
1
Estimated annual production
12,500
55,000
The company has a traditional costing system in which manufacturing overhead is
applied to units based on direct labor-hours.
\$2,000,000
Estimated total direct labor-hours
80,000DLHs
Required:
1] Using Exhibit 6-12 as a guide, compute the product margins for the Better and
Great products under the company’s traditional costing systems. Assume all units are
sold.
2] The company is considering replacing its traditional costing system with an activitybased costing system that would assign its manufacturing overhead to the following four
activity cost pools (the other category contains organization-sustaining and idle capacity
costs);
Activities and activity measures
Better Great Total
Supporting direct labor(DLH)
784,000
25,000 55,000 80,000
Batch setups (set ups)
500,000
400
100
500
Product sustaining (# of products) 600,000
1
1
2
Other
116,000
N/A
N/A
N/A