P6-65B Analyze cost behavior (Learning Objectives 1, 2, 3, & 4)

Carmichael Industries is in the process of analyzing its manufacturing overhead costs.

Carmichael Industries is not sure if the number of units produced or the number of direct labor (DL) hours is the best cost driver to use for predicting manufacturing overhead

(MOH) costs. The following information is available:

Month Manufacturing Overhead Costs Direct Labor Hours Units Produced MOH Cost per DL Hour MOH Cost per Unit Produced July............................................... $460,000 23,000 3,600 $20.00 $127.78 August.......................................... $515,000 26,400 4,320 $19.51 $119.21 September.................................... $425,000 19,000 4,200 $22.37 $101.19 October........................................ $448,000 21,600 3,400 $20.74 $131.76 November.................................... $527,000 27,000 5,750 $19.52 $ 91.65 December..................................... $437,000 19,400 3,250 $22.53 $134.46 The company prepares traditional (absorption costing) income statements for its bankers.
Global Music would also like to prepare contribution margin income statements for management use. Compute the following amounts that would be shown on these income statements:
1. Gross profit 2. Contribution margin 3. Total expenses shown below the gross profit line 4. Total expenses shown below the contribution margin line 5. Dollar value of ending inventory under absorption costing 6. Dollar value of ending inventory under variable costing 7. Which income statement will have a higher operating income? By how much? Explain.