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aIncome Statement (absorption costing)For the Year Ended December 31, 2019SalesCost of goods sold:Total manufacturing costsGross profitNet incomeIncome Statement (variable costing)For the Year Ended December 31, 2019Sales2,800,000Variable cost of goods sold:Operating expensesDirect materialsDirect laborManufacturing overheadTotal variable manufacturing costs175,000880,000720,000544,0002,319,000268,000Total variable costManufacturing margin2,051,000$749,000175,000Contribution marginLess: fixed costs and expensesManufacturing overheadOperating expensesTotal fixed costs and expenses574,000$320,000240,000560,000Net income14,000

Question

Summarized data for 2019 (the first year of operations) for Gorman Products, In. are as follows

Sales (70,000 units) $2,800,00
Production costs (80,000 units):  
     Direct materials 880,000
     Direct labor 720,000
Manufacturing overhead:  
     Variable 544,000
     Fixed 320,000
Operating expenses:  
     Variable 175,000
     Fixed 240,000
Depreciation on equipment 60,000
Real estate taxes 18,000
Personal property taxes (inventory and equipment 28,000
Personnel department expenses 30,000

 

a.) Prepare an income statement based on full absortion costing

b) Prepare an income statement based on variable costing (I completed this, see attached spreadsheet.  I just need help on a, c, and d)

c) Assume that you must decide quickly whether to accept a special one-time order for 1000 units for $25 per unit.  Which income statement presentthe most relevant data?  Determine the apparent profit or loss on the special order based solely on these data.

d) If the ending inventory is destroyed by fire, which costing approach would you use as a basis for filing an insurance claim for the fire loss?  Why?

a
Income Statement (absorption costing)
For the Year Ended December 31, 2019
Sales
Cost of goods sold:
Total manufacturing costs
Gross profit
Net income
Income Statement (variable costing)
For the Year Ended December 31, 2019
Sales
2,800,000
Variable cost of goods sold:
Operating expenses
Direct materials
Direct labor
Manufacturing overhead
Total variable manufacturing costs
175,000
880,000
720,000
544,000
2,319,000
268,000
Total variable cost
Manufacturing margin
2,051,000
$
749,000
175,000
Contribution margin
Less: fixed costs and expenses
Manufacturing overhead
Operating expenses
Total fixed costs and expenses
574,000
$
320,000
240,000
560,000
Net income
14,000
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a Income Statement (absorption costing) For the Year Ended December 31, 2019 Sales Cost of goods sold: Total manufacturing costs Gross profit Net income Income Statement (variable costing) For the Year Ended December 31, 2019 Sales 2,800,000 Variable cost of goods sold: Operating expenses Direct materials Direct labor Manufacturing overhead Total variable manufacturing costs 175,000 880,000 720,000 544,000 2,319,000 268,000 Total variable cost Manufacturing margin 2,051,000 $ 749,000 175,000 Contribution margin Less: fixed costs and expenses Manufacturing overhead Operating expenses Total fixed costs and expenses 574,000 $ 320,000 240,000 560,000 Net income 14,000

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check_circleAnswer
Step 1

a.) Prepare an income statement based on full absortion costing:

 

Gorman Products, Inc.,
Income statement (absorption costing)
For the year ended December 31, 2019
Amount in S
28,00,000
Particulars
Sales (70,000 units)
Less: Cost of goods sold:
Direct Material (80000 units@ S 11 each)
Direct Labour (80000 units@ S 9 each)
Manufacturing Overhead-Variable(80000 units@ S6.8 each)
Manufacturing Overhead - fixed(800000 units @ $4 each)
Total manufacturing costs
Less: Closing Inventory ( 10,000 units*S30.8)
8,80,000
7,20,000
5,44,000
3,20,000
24,64,000
3,08,000
21,56,000
6,44,000
551800
92.200
Cost of Goods Sold
Gross Profit
Less: Total other operating expenses and fixed costs
Net Profit/ Loss
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Gorman Products, Inc., Income statement (absorption costing) For the year ended December 31, 2019 Amount in S 28,00,000 Particulars Sales (70,000 units) Less: Cost of goods sold: Direct Material (80000 units@ S 11 each) Direct Labour (80000 units@ S 9 each) Manufacturing Overhead-Variable(80000 units@ S6.8 each) Manufacturing Overhead - fixed(800000 units @ $4 each) Total manufacturing costs Less: Closing Inventory ( 10,000 units*S30.8) 8,80,000 7,20,000 5,44,000 3,20,000 24,64,000 3,08,000 21,56,000 6,44,000 551800 92.200 Cost of Goods Sold Gross Profit Less: Total other operating expenses and fixed costs Net Profit/ Loss

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Step 2

c)

Income statement based on the variable costing presents the most relevant data. As it segregates the variable costs and fixed costs, it is easy to identify the net i...

Amount in $
Sales (1,000 units@$25)
Less: Variable cost of goods sold
Direct Material (1,000 units@S11)
Direct Labour (1,000 units@S9)
25000
11000
9000
Manufacturing Overhead (Variable) (1,000
6800
-1800
units@S6.8)
Gross Contribution
Operating Expenses(Variable) (1,000
2500
-4300
units@$2.5)
Loss
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Amount in $ Sales (1,000 units@$25) Less: Variable cost of goods sold Direct Material (1,000 units@S11) Direct Labour (1,000 units@S9) 25000 11000 9000 Manufacturing Overhead (Variable) (1,000 6800 -1800 units@S6.8) Gross Contribution Operating Expenses(Variable) (1,000 2500 -4300 units@$2.5) Loss

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