Value Strings produces student-grade violins for beginning violin students. The company produced 2,500 violins in its first month of operations. At month end, 750 finished violins remained unsold. There was no inventory in work in process. Violins were sold for $122.50 each. Total costs from the month are as follows:
Direct materials used .................................................. $125,500
Direct labor .................................................................. $ 50,000
Variable manufacturing overhead ............................... $ 32,000
Fixed manufacturing overhead ................................... $ 42,500
Variable selling and administrative expenses ............... $ 8,000
Fixed selling and administrative expenses ................... $ 12,100
The company prepares traditional (absorption costing) income statements for its bankers. Value Strings would also like to prepare contribution margin income statements for management use. Compute the following amounts that would be shown on these income statements:
1. Gross profit
2. contribution margin
3. Total expenses shown below the gross profit line
4. Total expenses shown below the contribution margin line
5. Dollar value of ending inventory under absorption costing
6. Dollar value of ending inventory under variable costing
7. Which income statement will have a higher operating income? By how much? Explain.