The 2014 data that follow pertain to Rick’s Radical Eyewear, a manufacturer of swimming goggles. (Rick’s Radical Eyewear had no beginning Finished Goods Inventory in January 2014.)

Number of goggles produced........... 240,000

Number of goggles sold ............195,000

Sales price per unit ................$ 38

Variable manufacturing cost per unit......... 18

Sales commission expense per unit........... 8

Fixed manufacturing overhead ...........1,800,000

Fixed selling and administrative costs .......290,000

Requirements

1. Prepare both conventional (absorption costing) and contribution margin (variable costing) income statements for Rick’s Radical Eyewear for the year ended December 31, 2014.

2. Which statement shows the higher operating income? Why?

3. Rick’s Radical Eyewear’s marketing vice president believes a new sales promotion that costs $ 130,000 would increase sales to 220,000 goggles. Should the company go ahead with the promotion? Give your reasoning.