Problem 19-3B

Income reporting, absorption costing, and managerial ethics

C1

Pool Pro produces and sells liquid chlorine for swimming pools. The company annually produces and sells 300,000 gallons of its chlorine. Because of this year's cool summer, projected demand for its product is only 250,000 gallons. Based on projected production and sales of 250,000 gallons, the company estimates the following income using absorption costing.

Sales (250,000 gallons at $8 per gallon) $2,000,000 Cost of goods sold (250,000 gallons at $6.80 per gallon). . . 1,700,000 Gross profit . . . . . 300,000 Selling and administrative expenses 300,000 Income. . . . .Direct materials. . ... . $1.00 per gallon Variable overhead . . ... $0.40 per gallon Direct labor . . . . . . . . . $0.60 per gallon Fixed overhead ($1,200,000/250,000 gallons) . .. $4.80 per gallon