The 2016 data that follow pertain to Frank’s Fantastic Eyewear, a manufacturer of swimming goggles. (Frank’s Fantastic Eyewear had no beginning Finished Goods Inventory in January 2016.)
Number of goggles produced...........180,000
Number of goggles sold .............145,000
Sales price per unit ...............$ 35
Variable manufacturing cost per unit ........ 15
Sales commission cost per unit .......... 1
Fixed manufacturing overhead ..........720,000
Fixed selling and administrative costs ......140,000
Requirements
1. Prepare both conventional (absorption costing) and contribution margin (variable costing) income statements for Frank’s Fantastic Eyewear for the year ended December 31, 2016.
2. Which statement shows the higher operating income? Why?
3. Frank’s Fantastic Eyewear’s marketing vice president believes a new sales promotion that costs $50,000 would increase sales to 155,000 goggles. Should the company go ahead with the promotion? Give your reasoning.