The annual data that follow pertain to Rays, a manufacturer of swimming goggles (Rays had no beginning inventories).
Sales price............................................................................................ $ 35
Variable manufacturing expense per unit............................................. 15
Sales commission expense per unit....................................................... 5
Fixed manufacturing overhead............................................................. 2,000,000
Fixed operating expenses...................................................................... 250,000
Number of goggles produced............................................................... 200,000
Number of goggles sold........................................................................ 185,000
Requirements
1. Prepare both conventional (absorption costing) and contribution margin (variable costing) income statements for Rays for the year.
2. Which statement shows the higher operating income? Why? Reconcile the difference between the two statements.
3. Rays’ marketing vice president believes a new sales promotion that costs $150,000 would increase sales to 200,000 goggles. Should the company go ahead with the promotion? Give your reason.