Question

ABC Company gathered the following information regarding itsonly product:
Variable selling and administrative expenses $30,000
Direct labor 20,000
Variable factory overhead 17,000
Fixed selling and administrative expenses 14,000
Direct materials used 15,000
Fixed factory overhead 10,000
Units produced and sold 25,000 units
Selling price per unit $30

Required:
a. Prepare an income statement using the contribution approach.
b. Prepare an income statement using the absorption approach.

Answer 1

a.

ABC Company
Contribution Approach Income Statement
Sales (25,000 x 30)		$750,000
Less: Variable expense:
Direct materials	15,000
Direct labor	20,000
Variable factory overhead	17,000
Variable selling and administrative expenses	30,000
Total Variable expenses		-82,000
Contribution margin		$668,000
Less: Fixed expense:
Fixed factory overhead	10,000
Fixed selling and administrative expenses	14,000
Total fixed expenses		-24,000
Net Income		$644,000

b.

ABC Company
Absorption Approach Income Statement
Sales (25,000 x 30)		$750,000
Cost of goods sold:
Direct materials	15,000
Direct labor	20,000
Variable factory overhead	17,000
Fixed factory overhead	10,000
Cost of goods sold		-62,000
Gross profit		$688,000
Operating expenses:
Variable selling and administrative expenses	30,000
Fixed selling and administrative expenses	14,000
Total operating expense		-44,000
Net Income		$644,000

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