Dynasty Company manufactures stackable plastic cubes that are used for storage in dorm rooms. In August 2015, Dynasty began producing multicoloured cubes. During the month of August, 9,000 were produced, and 8,800 were sold at $7.50 each. The following costs were incurred:
Direct materials ........................... $10,800
Direct labour .............................. 6,750
Variable overhead ........................ 5,850
Fixed overhead ........................... 27,900
A selling commission of 10 percent of sales price was paid. Administrative expenses, all fixed, amounted to $23,000.
Required:
1. Calculate the unit cost and the cost of ending inventory under absorption costing.
2. Calculate the unit cost and the cost of ending inventory under variable costing.
3. What is the contribution margin per unit?
4. Dynasty believes that multicoloured cubes will really take off after one year of sales. Management thinks August 2016 sales will be twice as high as August 2015 sales. Prepare an income statement for August 2016 using the assumed higher level of sales. Which costing method should be used-absorption costing or variable costing?
5. Explain the difference in the profitability measures between absorption and variable costing.