Value Strings produces studentgrade violins for beginning vi

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 progress. Violins were sold for $122.50 each. Total costs from the month are as follows: Direct materials used: $125,000 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 expense 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. This requires 2 income statements. Please read instructions carefully.

Solution

1 Variable costing Product cost Direct material 50.00 (125000/2500) Direct labor 20.00 (50000/2500) Variable manufacturing overhead 12.80 (32000/2500) Variable manufacturing cost 82.80 Units manufactured 2500 Units sold 1,750 Income statement Sales revenue 214375 Less Variable expense Variable manufacturing cost 144900 (82.8*1750) Variable selling and admin cost 8000 Total variable expense 152900 Contribution margin 61475 Less Fixed cost Fixed manufacturing expense 42500 Fixed Selling and Admin expense 12100 Total fixed expenses 54600 Net operating income 6875 Ending inventory 62100 (82.8*750) 1 Absorption costing Product cost Direct material 50.00 Direct labor 20.00 Variable manufacturing overhead 12.80 Fixed manufacturing (42500/2500) 17.00 Total product cost 99.80 Units produced 2500 Units sold 1,750 Income statement Sales revenue 214375 cost of goods sold Beginning inventory 0 cost of goods manufactured 249500 Add Goods available for sale 249500 Ending inventory 74850 (750*99.8) Less Cost of goods sold 174650 Gross profit 39725 Selling and admin expenses Less Variable marketing and admin expense 8000 Fixed marketing and selling expense 12100 Total Selling and admin expenses 20100 Net operating income 19625