Portland Optics, Inc., specializes in manufacturing lenses for large telescopes and cameras used in space exploration. As the specifications for the lenses are determined by the customer and vary considerably, the company uses a job-order costing system. Manufacturing overhead is applied to jobs on the basis of direct labor hours, utilizing the absorption- or full-costing method. Portland€™s predetermined overhead rates for 2009 and 2010 were based on the following estimates:

Jim Bradford, Portland€™s controller, would like to use variable (direct) costing for internal reporting purposes as he believes statements prepared using variable costing are more appropriate for making product decisions. In order to explain the benefits of variable costing to the other members of Portland€™s management team, Jim plans to convert the company€™s income statement from absorption costing to variable costing. He has gathered the following information for this purpose, along with a copy of Portland€™s 2009€“ 2010 comparative income statement.

Portland€™s actual manufacturing data for the two years are as follows:

The company€™s actual inventory balances were as follows:

For both years, all administrative expenses were fixed, while a portion of the selling expenses resulting from an 8 percent commission on net sales was variable. Portland reports any over- or underapplied overhead as an adjustment to the cost of goods sold.
Required:
1. For the year ended December 31, 2010, prepare the revised income statement for Portland Optics, Inc., utilizing the variable-costing method. Be sure to include the contribution margin on the revised income statement.
2. Describe two advantages of using variable costing rather than absorptioncosting.

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2009 2010 Direct labor hours Direct labor cost Fixed manufacturing overhead Variable manufacturing overhead 32,500 44,000 $325,000 $130,000 $162,500 $462,000 $176,000 $198,000 Portland Optics, Inc. Comparative Income Statement For the Years 2009-2010 2009 2010 Net sales Cost of goods sold: S1,140,000 S1,520,000 Finished goods at January 1 S 16,000 25,000 976,000 S 736,000 $1,001,000 14.000 S 711,000 987,000 7,000 S 723,000 S 994,000 S 417,000 S526,000 (190,000) (160,000) (187000) s 107000 149.000 Cost of goods manufactured Total available Less: Finished goods at December 31 720,000 25,000 12,000 Unadjusted cost of goods sold Overhead adjustment Cost of goods sold Gross profit Selling expenses Administrative expenses (150,000) Operating income 2009 2010 Direct labor hours Direct labor cost Direct materials used Fixed manufacturing overhead 30,000 42,000 $300,000 $140,000 $132,000 $435,000 $210,000 $175,000 December 31, December 31, December 31, 2010 $18,000 $60,000 2008 2009 $36,000 $34,000 $32,000 Direct materials Work in process: Costs Direct labor hours $44,000 1,800 1,400 2,500 Finished goods: Costs Direct labor hours $16,000 700 $25,000 S14,000 1,080 550