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.
c. Compute the effect on net income of accepting a special order for 1500 units
at $16 per unit assuming excess capacity.

Answer 1

Solution

ABC Company

a. Income Statement using the contribution margin approach:

ABC Company
Income Statement (Contribution Margin Approach)
Sales Revneue	$750,000
Less: variable expenses:
Direct materials used	$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
Fixed costs:
Factory overhead	$10,000
Fixed selling and administrative expenses	$14,000
Total fixed expenses	$24,000
Net Income	$644,000

Sales revenue = 25,000 units x $30 = $750,000

b. Income Statement using Absorption Costing:

ABC Company
Income Statement using Absorption Costing
Sales Revenue	$750,000
Cost of Goods Sold:
Direct material used	$15,000
Direct labor	$20,000
Variable factory overhead	$17,000
Fixed Factory overhead	$10,000
Cost of Goods Sold:	$62,000
Gross margin	$688,000
Less: selling and administrative expenses:
Variable	$30,000
Fixed	$14,000	$44,000
Net Income	$644,000

c. Computation of the effect on net income of the acceptance of special order for 1,500 units at $16 per unit assuming excess capacity:

Sales price per unit            $16

Less: variable costs:

Direct materials $15,000/25,000 = $0.60

Direct labor $20,000/25,000 = $0.80

Variable factory OH $17,000/25,000 = $0.68

Selling and administrative overhead $30,000/25,000 = $1.20

            Total variable cost per unit = $3.28

Contribution margin per unit = 16 – 3.28 = $12.72

Hence, the effect of net income = $12.72 x 1,500 units = $19,080

The effect on net income by acceptance of special order is increase of $19,080