[The following information applies to the questions displayed below.] Far North

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[The following information applies to the questions displayed below.] Far North Telecom, Ltd., of Ontario, has organized a new division to manufacture and sell specialty cellular telephones. The division's monthly costs are shown below: Manufacturing costs: Variable costs per unit: Direct materials $89 Variable manufacturing overhead $4 Fixed manufacturing overhead costs (total) $243,600 Selling and administrative costs: Variable 12% of sales Fixed (total) $155,000 Far North Telecom regards all of its workers as full-time employees and the company has a long-standing no layoff policy. Furthermore, production is highly automated. Accordingly, the company includes its labor costs in its fixed manufacturing overhead. The cellular phones sell for $290 each. During September, the first month of operations, the following activity was recorded: Units produced 4,200 Units sold 3,400 rev: 02-09-2011 3.value: 2.00 points Requirement 1: (a) Compute the unit product cost under Absorption costing. (Omit the "$" sign in your response.) Unit product cost $ (b) Compute the unit product cost under Variable costing. (Omit the "$" sign in your response.) Unit product cost $ rev: 02-09-2011 check my workeBook Links (4)references 4.value: 2.00 points Requirement 2: Prepare an absorption costing income statement for September. (Input all amounts as positive values. Omit the "$" sign in your response.) $ $ rev: 02-09-2011 check my workeBook Links (4)references 5.value: 2.00 points Requirement 3: Prepare a contribution format income statement for September using variable costing. (Input all amounts as positive values except net operating loss which should be indicated by a minus sign. Omit the "$" sign in your response.) $ Variable expenses: $ Fixed expenses: $ rev: 02-09-2011 check my workeBook Links (4)references 6.value: 2.00 points Requirement 4: Assume that the company must obtain additional financing in order to continue operations. As a member of top management, would you prefer to rely on the statement in (2) above or in (3) above when meeting with a group of prospective investors? rev: 02-09-2011 Absorption costing statement Variable costing statement check my workeBook Links (4)references 7.value: 2.00 points Requirement 5: Reconcile the absorption costing and variable costing net operating incomes in requirement 2 and 3 above. (Negative amounts should be indicated by a minus sign. Omit the "$" sign in your response.) $ : Fixed manufacturing overhead cost deferred $

Explanation / Answer

The contribution format income statement is set up as:

Sales revenue
Less variable expenses
Equals Contribution margin
Less fixed expenses
Equals net operating income

So in your example, sales revenue equals $78,000 (60,000 loaves of bread times $1.30 per loaf). Your variable expenses are the cost of the ingredients put into the bread which vary with the level of production. So your variable costs total to $31,200 (40% of the $78,000 in sales). So now your contribution margin equals $46,800 ($78,000 sales - $31,200 variable costs). Your fixed expenses are the salaries, utilities, insurance, and depreciation on the oven & equipment that stay the same amount each year regardless of the quantity produced within a relevant range. Not sure if you need help calculating the annual depreciation expense using straight-line, but here's the computation:

($104,000 original cost - 10,400 scrap value (10% of the initial cost)) / 20 year useful life = $4,680

So fixed costs total to be $30,680 ($4,680 depreciation expense + $17,000 salaries + $7,000 utilities + $2,000 insurance). And finally, your net operating income for each year will be $16,120 ($46,800 contribution margin - $30,680 fixed costs).

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