PROBLEM $6-23$ Absorption and Variable Costing; Production Constant, Sales

Fluctuate LO$6-1,$ LO$6-2,$ LO$6-3$

Tami Tyler opened Tami's Creations, Inc., a small manufacturing company, at the beginning

of the year. Getting the company through its first quarter of operations placed a considerable

strain on Ms$.$ Tyler's personal finances. The following income statement for the first quarter

was prepared by a friend who has just completed a course in managerial accounting at State

University.

Tami's Creations, Inc.

Income Statement

For the Quarter Ended March $31$

Sales $(28,000$ units$)$

Variable expenses:

$$1,120,000$

Variable cost of goods sold.

Variable selling and administrative

Contribution margin

Fixed expenses:

Fixed manufacturing overhead

Fixed selling and administrative

Net operating loss

Ms$.$ Tyler is discouraged over the loss shown for the quarter, particularly because she had

planned to use the statement as support for a bank loan. Another friend, a CPA, insists that

the company should be using absorption costing rather than variable costing and argues that if

absorption costing had been used the company probably would have reported at least some profit

for the quarter.

At this point, Ms$.$ Tyler is manufacturing only one product$-$a swimsuit. Production and cost

data relating to the swimsuit for the first quarter follow:

Units produced

Units sold

Variable costs per unit:

Direct materials $....$

Direct labor

Variable manufacturing overhead

Variable selling and administrative

$$462,000$

$\frac{168,000}{630,000}$

$300,000$

$200,000$

$