For year ended December 31, 2006, firm a produced and sold 12,000 units of product. Fixed expenses associated with producing the product totaled $4000 for the year. A variable cost of $3.20 per unit was incurred to produce the product. Fixed expenses associated with selling the product totaled $ 2,700 for the year, while fixed costs associated with overall administration totaled $3,000 for the year. A variable cost of $0.40 per unit was incurred for product selling, while a variable cost of $0.30 per unit was associated with overall administration. A price of $6.25 per unit was realized on each unit of product sold.
a. using absorption costing as the basis, please present operating income for the year using the traditional income statement format.
b. now using variable costing as the basis, prepare an income statement for the year in the contribution margin format.
c. please determine the contribution margin per unit and the contribution margin ratio.
a. To calculate the operating income using absorption costing, we need to consider all the fixed and variable costs associated with producing and selling the product.
Total fixed manufacturing costs = Fixed expenses associated with production = $4,000
Total fixed selling expenses = $2,700
Total fixed administration expenses = $3,000
Variable manufacturing cost per unit = $3.20
Variable selling cost per unit = $0.40
Variable administration cost per unit = $0.30
Price per unit = $6.25
Total units sold = 12,000
First, let's calculate the total variable costs:
Total variable manufacturing cost = Variable manufacturing cost per unit * Total units sold = $3.20 * 12,000
Total variable selling cost = Variable selling cost per unit * Total units sold = $0.40 * 12,000
Total variable administration cost = Variable administration cost per unit * Total units sold = $0.30 * 12,000
Next, let's calculate the total fixed costs associated with production:
Total fixed manufacturing costs = $4,000
Now, let's calculate the total fixed costs associated with selling and administration:
Total fixed costs = Total fixed selling expenses + Total fixed administration expenses
Total fixed costs = $2,700 + $3,000
To calculate the operating income, we need to subtract the total costs from the total sales:
Total sales = Price per unit * Total units sold = $6.25 * 12,000
Operating income = Total sales - (Total variable costs + Total fixed costs)
Operating income = Total sales - (Total variable manufacturing cost + Total variable selling cost + Total variable administration cost + Total fixed manufacturing costs + Total fixed costs)
b. To prepare the income statement for the year using variable costing, we need to follow the contribution margin format.
Total sales = Price per unit * Total units sold = $6.25 * 12,000
Total variable costs = Total variable manufacturing cost + Total variable selling cost + Total variable administration cost
Contribution margin = Total sales - Total variable costs
Fixed costs = Total fixed manufacturing costs + Total fixed costs
Operating income = Contribution margin - Fixed costs
c. To determine the contribution margin per unit, we need to subtract the variable costs per unit from the price per unit:
Contribution margin per unit = Price per unit - Variable manufacturing cost per unit - Variable selling cost per unit - Variable administration cost per unit
To calculate the contribution margin ratio, we divide the contribution margin by the total sales:
Contribution margin ratio = (Contribution margin / Total sales) * 100