Question

Summarized data for 2016 (the first year of operations) for Gorman Products, Inc., are as follows:

Sales (75,000 units)					$1,500,000
Production costs (80,000 units)
Direct material					440,000
Direct labor					360,000
Manufacturing overhead:
Variable					272,000
Fixed					160,000
Operating expenses:
Variable					84,000
Fixed					120,000
Depreciation on equipment					30,000
Real estate taxes					9,000
Personal property taxes (inventory & equipment)					14,400
Personnel department expenses					15,000

a. Prepare an income statement based on full absorption costing.
Only use a negative sign with your answer for net income (loss), if the answer represents a net loss. Otherwise, do not use negative signs with any answers. Round answers to the nearest whole number, when applicable.

Absorption Costing Income Statement
Sales						Answer
Cost of Goods Sold:
Beginning Inventory					Answer
Direct materials					Answer
Direct labor					Answer
AnswerGross profitOperating expensesVariable manufacturing overheadManufacturing overheadContribution margin					Answer
Less: Ending Inventory					Answer
Cost of Goods Sold						Answer
AnswerGross profitOperating expensesVariable manufacturing overheadManufacturing overheadContribution margin						Answer
AnswerGross profitOperating expensesVariable manufacturing overheadManufacturing overheadContribution margin						Answer
Net Income (Loss)						Answer

b. Prepare an income statement based on variable costing.
Only use a negative sign with your answer for net income (loss), if the answer represents a net loss. Otherwise, do not use negative signs with any answers. Round answers to the nearest whole number, when applicable.

Variable Costing Income Statement
Sales						Answer
Variable cost of Goods Sold:
Beginning Inventory					Answer
Direct materials					Answer
Direct labor					Answer
AnswerGross profitVariable manufacturing overheadManufacturing overheadVariable operating expensesContribution margin					Answer
Less: Ending Inventory					Answer
Variable cost of goods sold						Answer
AnswerGross profitVariable manufacturing overheadManufacturing overheadVariable operating expensesContribution margin						Answer
AnswerGross profitVariable manufacturing overheadManufacturing overheadVariable operating expensesContribution margin						Answer
Fixed costs:
AnswerGross profitVariable manufacturing overheadManufacturing overheadVariable operating expensesContribution margin					Answer
Operating expenses					Answer
Total Fixed Cost						Answer
Net Income (Loss)						Answer

c. Assume that you must decide quickly whether to accept a special one-time order for 1,000 units for $15 per unit.

Which income statement presents the most relevant data? Answerabsorption costingvariable costing

Determine the apparent profit or loss on the special order based solely on these data.
Use a negative sign with your answer if the special order creates an apparent loss. Round answer to the nearest whole number.

$Answer

  

d. If the ending inventory is destroyed by fire, which costing approach would you use as a basis for filing an insurance claim for the fire loss? Why?
Select the most appropriate statement.

Absorption costing approach because the cost should include a reasonable portion of fixed manufacturing costs.

Variable costing approach because the cost should include a reasonable portion of fixed manufacturing costs.

Answer 1

a)
Unit cost - absorption costing
Variable cost
Direct material	5.5
Direct labor	4.5
Variable manufacturing overhead	3.4	13.4
Fixed manufacturing overhead		2
Total unit cost		15.4
Income statement
Sales ( 75000 units)		1500000
Less COGS ( 75000 * 15.4)		1155000
Gross Profit		345000
less
Variable operating expenses	84000
fixed operating expenses	120000
Depreciation on equipment	30000
Real estate taxes	9000
personal property taxes	14400
personnel expenses	15000	272400
Net Income		72600
b)
Unit cost - variable costing
Variable cost
Direct material	5.5
Direct labor	4.5
Variable manufacturing overhead	3.4
Total unit cost	13.4
Income statement
Sales ( 75000 units)		1500000
Less COGS ( 75000 * 13.4)		1005000
Gross Profit		495000
less
Variable operating expenses		84000
Contribution margin		411000
Less
Fixed manufacturing overhead	160000
fixed operating expenses	120000
Depreciation on equipment	30000
Real estate taxes	9000
personal property taxes	14400
personnel expenses	15000	348400
Net Income		62600
c)
Income statement based on variable costing provides a more relevant
data when one is to decide whether to accept a special order
This is because in such a decision only the incremental cost is relevant
Income statement - special order
Sales ( 1000 * 15)	15000
less
variable manufacturing cost ( 1000 * 13.4)	13400
variable operating expenses ( 1000 * 84000/75000)	1120
Net income	480

d)

            If ending inventory is destroyed by fire, the full absorption method will be used because the cost per unit is higher and if closing inventory is valued by this method the value will be higher , thereby getting a higher claim from the insurance company.