E6-58B Absorption and variable costing income statements

(Learning Objective 6)

The annual data that follow pertain to Goggle Water Optics, a manufacturer of swimming goggles (the company has no beginning inventories):

Sales price........................................................................................ $ 45 Variable manufacturing expense per unit........................................ $ 18 Sales commission expense per unit................................................. $ 14 Fixed manufacturing overhead........................................................ $1,980,000 Fixed operating expense................................................................. $ 235,000 Number of goggles produced......................................................... 220,000 Number of goggles sold.................................................................. 200,000 Requirements 1. Prepare both conventional (absorption costing) and contribution margin (variable costing) income statements for Goggle Water Optics for the year.

2. Which statement shows the higher operating income? Why?

3. The company’s marketing vice president believes a new sales promotion that costs

$140,000 would increase sales to 220,000 goggles. Should the company go ahead with the promotion? Give your reason.