Using variable and absorption costing, making decisions The 2018 data that follow pertain to Eli’s Electric Eyewear, a manufacturer of swimming goggles. (Eli’s Electric Eyewear had no beginning Finished Goods Inventory in January 2018.)

Number of goggles produced 245,000 Number of goggles sold 215,000 Sales price per unit \( 22Variable manufacturing cost per unit 8Sales commission cost per unit 5Fixed manufacturing overhead 1,470,000 Fixed selling and administrative costs 250,000 Requirements

1. Prepare both conventional (absorption costing) and contribution margin (variable costing) income statements for Eli’s Electric Eyewear for the year ended December 31, 2018.

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

3. Eli’s ElectricEyewear’s marketing vice president believes a new sales promotion that costs \)60,000 would increase sales to 220,000 goggles. Should the company go ahead with the promotion? Give your reasoning.

Particulars

Absorption costing

Variable Costing

Variable manufacturing overhead

$8

$8

Fixed manufacturing overhead ($1,470,000/245,000)

$6

-

Total unit product cost

$14

$8

Particulars

Absorption Costing

Net sales revenue ($22x215,000)

$4,730,000

Less: Cost of goods sold ($14x215,000)

$3,010,000

Gross profit

$1,720,000

Variable selling and administrative cost ($5x215,000)

$1,075,000

Fixed selling and administrative cost

$250,000

Operating Income

$395,000

Particulars

Variable Costing

Net sales revenue ($22x215,000)

$4,730,000

Less: Cost of goods sold

Variable cost of goods sold ($8x215,000)

$1,720,000

Variable selling and administrative cost ($5x215,000)

$1,075,000

Contribution margin

$1,935,000

Less: Fixed costs

Fixed costs of goods sold

$1,470,000

Fixed selling and administrative cost

$250,000

Operating Income

$215,000

Particulars

Variable Costing

Net sales revenue ($22x220,000)

$4,840,000

Less: Cost of goods sold

Variable cost of goods sold ($8x220,000)

$1,760,000

Variable selling and administrative cost ($5x220,000)

$1,100,000

Contribution margin

$1,980,000

Less: Fixed costs

Fixed costs of goods sold

$1,470,000

Fixed selling and administrative cost($250,000+$60,000)

$310,000

Operating Income

$200,000