Question

Violins- by - Lucy produces student-grade violins for beginning violin students. The company produced 2,400 violins in its first month of operations. At month-end, 650 finished violins remained unsold. There was no inventory in work in process. Violins were sold for $117.50 each. Total costs from the month are as follows:

Data Table:

Direct materials used: $111,400

Direct labor: $60,000

Variable manufacturing overhead: $35,000

Fixed manufacturing overhead: $52,800

Variable selling and administrative expenses: $11,000

Fixed selling and administrative expenses: $13,500

The company prepares traditional (absorption costing) income statements for its bankers. Lucy would also like to prepare contribution margin income statements for management use.

Read the requirements:

Gross profit

Contribution margin

Total expenses shown BELOW the GROSS PROFIT line

Total expense shown BELOW the CONTRIBUTION MARGIN line

Dollar value of ending inventory under absorption costing

Dollar value of ending inventory under variable costing

Which income statement has a higher operating income and by how much? Explain.

Answer 1

	Cost C	No. of units produced N	Cost per unit C/N	Ending Inventory units E	Ending inventory cost C*E
Direct materials used A	$111,400	24000	$4.642	650	$3,017.08
Direct labor B	60000	24000	$2.500	650	$1,625.00
Variable manufacturing overhead C	$35,000	24000	$1.458	650	$947.92
Fixed manufacturing overhead:	52800	24000	$2.200	650	$1,430.00
	$259,200.00				$7,020.00
Variable selling and administrative expenses:	$11,000	24000	$0.458	650
Fixed selling and administrative expenses:	13500
No, of units sold (24000-650)	23350
Absorption costing
Income statement
Sales (23350*117.5)		2743625
Less:
Cost of goods manufactured	$259,200.00
Less: ending Inventory	$7,020.00
Cost of good sold		$252,180
Gross profit		$2,491,445
Less:
Selling and administrative expenses:
Variable selling and administrative expenses (23350*1.458)	$34,052
Fixed selling and administrative expenses:	13500
Selling and administrative expenses:		$47,552
Net operating income		$2,443,893
Income statement
Sales (23350*117.5)		2743625
Less:
Variable Cost of goods manufactured (A+B+C)	$206,400.00
Less: ending Inventory (206400/24000*650)	5590	$200,810
Variable selling and administrative expenses (23350*1.458)		$34,052
Contribution Margin		$2,508,763
Less:
Fixed expenses
Fixed manufacturing overhead:	52800
Fixed selling and administrative expenses:	13500
		$66,300
Net operating income		$2,442,463
Gross profit	$2,491,445
Contribution margin	$2,508,763
Total expenses shown BELOW the GROSS PROFIT line	$47,552
Total expense shown BELOW the CONTRIBUTION MARGIN line	$66,300
Dollar value of ending inventory under absorption costing	$7,020.00
Dollar value of ending inventory under variable costing	5590
Which income statement has a higher operating income and by how much	Absorption costing
because fixed manufacturing overhead is deferred in ending inventory by $1430