Last quarter’s production (and sales)	100,000
Productivity capacity	140,000
Unit manufacturing cost:
Direct materials	$0.22
Direct labor	0.14
Variable overhead	0.09
Fixed overhead*	0.10
Total	$0.55

*Based on the productive capacity of 140,000 units.

Nonmanufacturing costs:

Selling costs:

Fixed $10,000

Variable 5% of sales

Administrative (all fixed) $20,000

Total fixed overhead costs were $14,0000 (budgeted and actual). Variable overhead was incurred as expected. Overhead variances are closed to the Cost of Goods Sold. The average selling price for the 100,000 units sold was $0.90.

REQUIRED

1. Prepare absorption-costing and variable-costing income statements for the last quarter’s results. Will this information help Norma in building her case?

2. Suppose that Norma consults her marketing manager and finds that the division could have produced and sold 30,000 more concrete blocks with a unit selling price of $0.54. Compute the gross margin and contribution margin on the sale of these additional 30,000 blocks. Discuss why the two figures differ.

3. Prepare absorption- and variable – costing income statements that reflect the sale of additional 30,000 units at $0.54. Which figure in requirement 2, gross margin or contribution margin, gave the best indication of the impact of the 30,000 additional units on the division’s profits? Explain.

4. What approach would you take to convince Eric that variable costing is a useful managerial tool? Does he have any basis for his contention that a company must cover its full costs and that income statements should reflect all costs, not just variable costs? Explain.

Answer rating: 100% (QA)

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