The Jarvis Company Manufactures and markets two products. The following information pertains to the financial year 2014: 

Total fixed manufacturing overhead costs were $440,000. Fixed selling and administration costs were $140,000, with $20,000 of this amount being traceable to product A and $30,000 traceable to product B. The remainder of the fixed SGA cost is common to the two products. Jarvis uses machine hours as the basis to allocate overhead to products. Assume that the firm began 2014 with no inventories of any kind, that expected and actual production levels are the same for 2014, and that expected overhead equals actual overhead.

1.    Compute the overhead rate per machine hour. Determine the inventoriable cost per unit of product A and of product B (as would be determined under GAAP in the preparation of gross margin based income statement)

Overhead rate per machine hour $ ___________ per MH

Inventoriable cost per unit of Product A _______________   Product B $_______________

2.     Create a gross-margin based income statement (income statement as would be prepared under GAAP) to compute the income before taxes for 2014. What is the value of the inventory of finished goods under this approach? 

3.      Create a contribution-margin based income statement for 2014.  What is the value of the inventory of finished goods under this approach?

4.      Compare the income that you have computed in parts 2 and 3 above. If the incomes are the same (different), explain why the incomes are the same

Transcribed Image Text:

Production rate Number of units produced Number of units sold Variable manufacturing costs per unit Variable selling costs per unit Sales price per unit Product A Product B 10 units per machine hour 5 units per machine hour 400,000 75,000 375,000 60,000 $5 $2 $11 $3 $1 $5 Production rate Number of units produced Number of units sold Variable manufacturing costs per unit Variable selling costs per unit Sales price per unit Product A Product B 10 units per machine hour 5 units per machine hour 400,000 75,000 375,000 60,000 $5 $2 $11 $3 $1 $5

Answer rating: 100% (QA)

To compute the overhead rate per machine hour we need to determine the total overhead costs and divide it by the total machine hours Total fixed manuf... View the full answer