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Chapter 21: Q5SE (page 1168)

Calculating gross profit and operating income, absorption costing Calculate the gross profit and operating income for June using absorption costing

Use the following information for Short Exercises S21-4 and S21-5.

Dracut Company reports the following information for June:

Net Sales Revenue $ 755,000 Variable Cost of Goods Sold 240,000 Fixed Cost of Goods Sold 198,000 Variable Selling and Administrative Costs 168,000 Fixed Selling and Administrative Costs 79,000

Short Answer

Expert verified

Answer

Dracut Company’s gross profit is $317,000 and operating income is $70,000.

Step by step solution

01

Calculation of gross profit using absorption costing

Particulars

Amount

Net sales revenue

$755,000

Less: Cost of goods sold

Variable cost of goods sold

$240,000

Fixed cost of goods sold

$198,000

Gross profit

$317,000

02

Statement showing operating income

Particulars

Amount

Net sales revenue

$755,000

Less: Cost of goods sold

Variable cost of goods sold

$240,000

Fixed cost of goods sold

$198,000

Gross profit

$317,000

Less: Selling and administrative cost

Variable selling and administrative cost

$168,000

Fixed selling and administrative cost

$79,000

Operating Income

$70,000

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Most popular questions from this chapter

Question: Preparing absorption costing income statements, production exceeds sales

Refer to Exercise E21-16.

Requirements:

  1. Prepare the April income statement using absorption costing.
  2. Determine the product cost per unit and the total cost of the 1,000 cases in Finished Goods Inventory as of April 30.
  3. Is the April 30 balance in Finished Goods Inventory higher or lower than variable costing? Explain why

Hayden Company has 50 units in Finished Goods Inventory at the beginning of the accounting period. During the accounting period, Hayden produced 150 units and sold 200 units for \(150 each. All units incurred \)80 in variable manufacturing costs and \(20 in fixed manufacturing costs. Hayden also incurred \)7,500 in Selling and Administrative Costs, all fixed. Calculate the operating income for the year using absorption costing and variable costing.

Analyzing profitabilityFather Furniture Company manufactures and sells oak tables and chairs. Price and cost data for the furniture follow:

Tables Chairs Sales Price \( 800 \) 70 Variable manufacturing costs 60025Sales commission (10%) 807Relative Furniture has three sales representatives: Adam, Ben, and Caleb. Adam sold 100 tables with 6 chairs each. Ben sold 110 tables with 4 chairs each. Caleb sold 80 tables with 8 chairs each.

Requirements

1. Calculate the total contribution margin and the contribution margin ratio for each sales representative (round to two decimal places).

2. Which sales representative has the highest contribution margin ratio? Explain why.

How do service companies differ from manufacturing companies?

Question: The Hurley Hat Company manufactures baseball hats. Hurley’s primary customers are sporting goods stores that supply uniforms to youth baseball teams. Following is Hurley’s income statement for 2018:

In 2018, Hurley produced and sold 200,000 baseball hats. Of the Cost of Goods Sold, \(150,000 is fixed; 80% of the Selling and Administrative Expenses are fixed. There were no beginning inventories on January 1, 2018. The company is considering two options to increase sales.

Option 1: The company is operating at 100,000 hats below full production capacity and is considering increasing advertising to increase sales to the production capacity level in 2019. The marketing director predicts that an additional \)100,000 expenditure for advertising would increase sales to 300,000 hats per year.

Option 2: The sales manager has been negotiating with buyers for several national sporting goods retailers and recommends the company expand production capacity to 400,000 hats in order to secure long-term contracts beginning in 2019. The expansion is expected to increase fixed manufacturing costs by \(200,000 per year. Additionally, the retailers are requesting a higher-quality hat, and the changes to the hat materials and manufacturing process would increase variable manufacturing costs by \)1 per hat for the additional 200,000 hats. (The original 200,000 hats manufactured and sold would not be affected by this change.)

Requirements

1. Use the data from the 2018 income statement to prepare an income statement using variable costing. Assume no beginning or ending inventories. Calculate the contribution margin ratio. Round to two decimal places.

2. Prepare an absorption costing income statement assuming the company pursues Option 1 and increases advertising and production and sales increase to 300,000 hats.

3. Refer to the original data. Prepare an absorption costing income statement assuming the company pursues Option 2 and increases capacity and sales and production increases to 400,000 total hats.

4. Which option should the company pursue? Explain your reasoning.
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