Question

Special Order
Total cost data follow for Glendale Manufacturing Company, which has a normal capacity per period of 8,000 units of product that sell for $60 each. For the foreseeable future, regular sales volume should continue to equal normal capacity.

Variable and Absorption Costing Summarized data for 2016 (the first year of operations) for Gorman Products, Inc., are as follows: Sales (75,000 units) $6,000,000 Production costs (80,000 units) Direct material 1,760,000 Direct labor 1,440,000 Manufacturing overhead: Variable 1,088,000 Fixed 640,000 Operating expenses: Variable 336,000 Fixed 480,000 Depreciation on equipment 120,000 Real estate taxes 36,000 Personal property taxes (inventory & equipment) 57,600 Personnel department expenses 60,000 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 $60 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.

Notes:
1. Beyond normal capacity, fixed overhead costs increase $1,800 for each 500 units or fraction thereof until a maximum capacity of 10,000 units is reached.
2. Selling expenses consist of a 6% sales commission and shipping costs of 80 cents per unit. Glendale pays only three-fourths of the regular sales commission on sales totaling 501 to 1,000 units and only two-thirds the regular commission on sales totaling 1,000 units or more.

Glendale's sales manager has received a special order for 1,200 units from a large discount chain at a price of $36 each, F.O.B. factory. The controller's office has furnished the following additional cost data related to the special order:

1. Changes in the product's design will reduce direct material costs $1.50 per unit.
2. Special processing will add 20% to the per-unit direct labor costs.
3. Variable overhead will continue at the same proportion of direct labor costs.
4. Other costs should not be affected.

a. Present an analysis supporting a decision to accept or reject the special order. (Round computations to the nearest cent.)

Differential Analysis
	Per Unit	Total
Differential revenue		Answer
Differential costs
Direct material	Answer
Direct labor	Answer
Variable manufacturing overhead	Answer
Selling:
Commission	Answer
Shipping (F.O.B. factory terms)	Answer
Total variable cost	Answer	Answer
Contribution margin from special order		Answer
Fixed cost increment:
Extra cost		Answer
Profit on special order		Answer

b. What is the lowest price Glendale could receive and still make a profit of $3,600 before income taxes on the special order?

Round answer to two decimal places, if applicable.

Answer 1

Solution:

c. Income Statement based on Variable Costing Method shows more relaible profit as compared to Absorption Costing Method.