Question

The annual data that follow pertain to Sea Down There, a manufacturer of swimming goggles (the company had no beginning inventory):Sales Price $ 49Variable Manufacturing expense per unit $22Sales commission expense per unit $ 11Fixed Manufacturing overhead $2,760,000Fixed operating expenses $245,000Number of goggles produced $ 230,000Number of goggles sold $ 215,000(1) Prepare both conventional (absorption costing) and contribution margin (variable costing) income statements for Sea Down There for the year.(2) Which statement shows the higher operating income? Why?(3) The company marketing vice president believes a new sales promotion that costs $ 150,000 would increase sales to 230,000 goggles. Should the company go ahead with the promotion? Give your reason.

Answer 1

1. SEA DOWN

INCOME STATEMENT

conventional Variable

sales 10535000 10535000

cost of sales -7310000 - 4730000

commission - 2365000

contribution 3440000

gross profit 3225000

commission -2365000

fixed costs - 2760000

operating costs -245000 -245000

net income 615000 435000

2. Absorption method has the higher operating income, because manufacturing costs are charged to the cost of units and are usually less costly per unit ( the more units produced the lesser fixed costs become) than in total and in Variable method fixed costs are taken as a total.

3. conventional Variable

sales 11270000 11270000

cost of sales -7820000 -5060000

commission -2530000

contribution 3680000

gross profit 3450000

commission -2530000

fixed costs - 2760000

marketing cost -150000 -150000

operating costs -245000 -245000

net income 525000 525000

If the company is using Absorption method as basis for decision then it should not take the promotion as it yields to a decrease in net income. If the company uses Variable method as basis then it should take the promotion as it leads to an increase in profits.

Overall I think the company should take the promotion because it has an increased contribution to fixed costs and the two methods yield the same net income and that is a guarantee.

Step-by-step explanation:

units

opening 0

produced 230000

closing - 15000

sold 215000

unit cost

Arbsoption Variable

VC 22 22

FIXED 12

UNIT COST 34 22