Question

Audiophonics Limited manufactures and sells high-quality and durable ear buds for use with personal electronics that are custom moulded to each customer’s ear. Cost data for the product follow:
Variable costs per unit:
Direct materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12
Direct labour. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Variable factory overhead. . . . . . . . . . . . . . . . . . . . . . . . . 8
Variable selling and administrative . . . . . . . . . . . . . . . . . 6
Total variable costs per unit . . . . . . . . . . . . . . . . . . . . . . . $50
Fixed costs per month:
Fixed manufacturing overhead. . . . . . . . . . . . . . . . . . . . . $240,000
Fixed selling and administrative. . . . . . . . . . . . . . . . . . . . 180,000
Total fixed costs per month . . . . . . . . . . . . . . . . . . . . . . . $420,000
The product sells for $80 per unit. Production and sales data for May and June, the first two months of operations, are as follows:
Income statements prepared by the Accounting Department using absorption costing are presented below:
Required:
1. Determine the unit product cost under
a. Absorption costing.
b. Variable costing.
2. Prepare variable costing income statements for May and June using the contribution approach.
3. Reconcile the variable costing and absorption costing operating income figures.
4. The company’s Accounting Department has determined the break-even point to be 14,000 units per month, computed as follows:
Fixed cost per month = $420,000 = 14,000 units
Unit contribution margin $30 per unit
On receiving this figure, the president commented, “There’s something peculiar here. The controller says that the break-even point is 14,000 units per month. Yet we sold only 13,000 units in May, and the income statement we received showed a $2,000 profit. Which figure do we believe?” Prepare a brief explanation of what happened on the May income statement.


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  • CreatedJuly 08, 2015
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