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# W Produce Anything, Inc., a small manufacturing company, commenced operations at the beginning of the year. The following income statement for the

W Produce Anything, Inc., a small manufacturing company, commenced operations at the beginning of the year. The following income statement for the first quarter was prepared by MBA graduate #1.

We Produce Anything, Inc.
Income Statement
For The Quarter Ended March 31
Sales (46,000 units)                                                                               \$2,300,000
Variable expenses
Variable cost of goods sold                                      910,800
Variable selling & administrative                            368,000           1,278,800
Contribution Margin                                                                             1,021,200
Fixed expenses
Fixed selling & administrative                                 431,200           1,031,200
Net Operating Loss                                                                               \$(10,000)
Management is discouraged about the loss. MBA graduate #2 insists that the company should be using absorption costing instead of variable costing. She (or he) states that, if absorption costing had been used, the company would have reported a profit for the quarter.
For the first quarter, the company is producing only one product. Production and cost data relating to that product for the first quarter is:
Units produced                                                                                           50,000
Units sold                                                                                                   46,000
Variable costs per unit
Direct materials                                                                               \$4.20
Direct labor                                                                                      14.40

Required:
1a] Compute the unit cost under absorption costing.
b] Redo the company’s income statement for the quarter using absorption costing.
c] Reconcile the variable and absorption costing net operating income (loss) figures.
2] Was the MBA graduate #2 correct in stating that the company really earned a profit for the quarter? Please explain your answer.
3] During the second quarter of operations, the company again produced 50,000 units but sold 54,000 units. (Assume no change in fixed costs.)
a) Prepare a contribution format income statement for the second quarter using variable costing.
b) Prepare an income statement for the second quarter using absorption costing.
c) Reconcile the variable and absorption costing net operating incomes.

The S Corporation makes two types of skis—Better and Great. The data for the two product lines is:
Better              Great

Selling price per unit                                                                  210                    150

Direct materials per unit (\$)                                               110                    80
Direct labor per unit (\$)                                                        30                    15
Direct labor-hours per unit                                                                 2                     1
Estimated annual production                                            12,500             55,000
The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours.
Estimated total direct labor-hours                                                  80,000DLHs

Required:
1] Using Exhibit 6-12 as a guide, compute the product margins for the Better and Great products under the company’s traditional costing systems. Assume all units are sold.
2] The company is considering replacing its traditional costing system with an activity-based costing system that would assign its manufacturing overhead to the following four activity cost pools (the other category contains organization-sustaining and idle capacity costs);
Activities and activity measuresEst. Overhead costsExpected activity
Better   Great   Total
Supporting direct labor(DLH)            784,000                     25,000  55,000  80,000
Batch setups (set ups)                        500,000                          400        100        500
Product sustaining (# of products)    600,000                               1             1            2
Other                                              116,000                             N/A         N/AN/A