PROBLEMS 1. Rosotti Corporation began operations on January 1, 2005. Cost and sa

Question

PROBLEMS 1. Rosotti Corporation began operations on January 1, 2005. Cost and sales information for 2005 is summarized below. Total costs of operations: Direct materials $60 per unit Direct labor $90 per unit Variable factory overhead $40 per unit Variable selling expenses $11 per unit Variable administrative expenses $10 per unit Sales price $400 per unit Fixed factory overhead costs $1,200,000 Fixed selling expenses $11,900,000 Fixed administrative expenses $12,100,000 Units produced 300,000 Units sold 250,000 Units in ending inventory 50,000 Tax rate 40% Required: a. Prepare an income statement for 2005 for the company under absorption costing. b. Prepare an income statement for 2005 for the company under variable costing. Hint: The income tax expense can only be calculated correctly under the full-absorption method. Use the same amount of income tax expense on both income statements.

Explanation / Answer

SOLUTION:

ABSORPTION COSTING INCOME STATEMENT Sales (300,000 * $400) 120,000,000 Cost of goods sold      Cost of goods manufactured 58,200,000       Variable cost (300,000 * 40) 12,000,000       Fixed cost        Direct material (300,000 * $60) 18,000,000        Direct labor 27,000,000        Fixed factory overhead 1,200,000 Less: Inventory 9,700,000 (58,200,000 / 300,000 = 194 per unit); 194 * 50,000 Cost of goods sold 48,500,000 Gross profits 71,500,000 Selling and administrative expenses       Variable cost (300,000 * (10+11)) 6,300,000       Fixed cost (11,900,000 + 12,100,000) 24,000,000 30,300,000 Income from operation 41,200,000 VARIABLE COSTING INCOME STATEMENT Sales (300,000 * $400) 120,000,000 Variable cost of goods sold 57,000,000        Direct material ( $60 per unit) 18,000,000        Direct labor ($90 per unit) 27,000,000        Variable factory overhead ($40 per unit) 12,000,000 Less: Ending inventory (50,00*$190 per unit) 9,500,000 47,500,000 Manufacturing margin 72,500,000 Selling and administrative expenses       Variable cost (300,000 * (10+11)) 6,300,000 Contribution margin 66,200,000 Fixed costs:       Fixed manufacturing costs (300,000 * $150 45,000,000       Fixed Selling and administrative expenses 24,000,000 69,000,000 Income/Loss from operations -2,800,000

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