Question

Value Strings produces student-grade violins for beginning violin students. The company produced 2,500 violins in its first month of operations. At month end, 750 finished violins remained unsold. There was no inventory in work in progress. Violins were sold for $122.50 each. Total costs from the month are as follows: Direct materials used: $125,000 Direct labor: $50,000 Variable manufacturing overhead: $32,000 Fixed manufacturing overhead: $42,500 Variable selling and administrative expenses: $8,000 Fixed selling and administrative expenses: $12,100 The company prepares traditional (absorption costing) income statements for its bankers. Value Strings would also like to prepare contribution margin income statements for management use. Compute the following amounts that would be shown on these income statements. 1. Gross profit 2. Contribution margin 3. Total expenses shown BELOW the GROSS PROFIT line 4. Total expense shown BELOW the CONTRIBUTION MARGIN line 5. Dollar value of ending inventory under absorption costing 6. Dollar value of ending inventory under variable costing 7. Which income statement will have a higher operating income? By how much? Explain. This requires 2 income statements. Please read instructions carefully.

Answer 1

1	Variable costing
	Product cost
	Direct material	50.00	(125000/2500)
	Direct labor	20.00	(50000/2500)
	Variable manufacturing overhead	12.80	(32000/2500)
	Variable manufacturing cost	82.80
	Units manufactured	2500
	Units sold	1,750
	Income statement
	Sales revenue	214375
Less	Variable expense
	Variable manufacturing cost	144900	(82.8*1750)
	Variable selling and admin cost	8000
	Total variable expense	152900
	Contribution margin	61475
Less	Fixed cost
	Fixed manufacturing expense	42500
	Fixed Selling and Admin expense	12100
	Total fixed expenses	54600
	Net operating income	6875
	Ending inventory	62100	(82.8*750)
1	Absorption costing
	Product cost
	Direct material	50.00
	Direct labor	20.00
	Variable manufacturing overhead	12.80
	Fixed manufacturing (42500/2500)	17.00
	Total product cost	99.80
	Units produced	2500
	Units sold	1,750
	Income statement
	Sales revenue	214375
	cost of goods sold
	Beginning inventory	0
	cost of goods manufactured	249500
Add	Goods available for sale	249500
	Ending inventory	74850	(750*99.8)
Less	Cost of goods sold	174650
	Gross profit	39725
	Selling and admin expenses
Less	Variable marketing and admin expense	8000
	Fixed marketing and selling expense	12100
	Total Selling and admin expenses	20100
	Net operating income	19625