5. (20 pts.) Georgia Company has been producing and selling 100,000 units per ye

Question

5. (20 pts.) Georgia Company has been producing and selling 100,000 units per year. They have excess capacity. The following budget was prepared for the next year S12.50 5.00 3.00 Selling price per unit Direct materials per unit Direct labor per unit Variable overhead per unit Variable selling and administrative per unit 0.25 80,000 Total fixed overhead costs Total fixed selling and administrative 35 A) Prepare an income statement using the contribution approach B) Prepare an income statement using the absorption approach 6. (20 pts.) Texas Company produces and sells 22,000 units of a single product. Costs associated with this level of production are as follows: Direct materials Direct manufacturing labor Variable manufacturing overhead Fixed manufacturing overhead S15 per unit $45 per unit S25 per unit $40 per unit The product normally sells for $160 per unit. Texas Company has received a special order to sell 2,000 units at S120 per unit. Texas Company has excess production capacity Compute the amount by which the operating income of Texas Company would change if the special order was accepted.

Explanation / Answer

Texas Company Special Order Decision Item Effect of Special Order Sales (2,000 x $120) $                240,000 Less: Total Variable cost: Direct Material cost (2,000 x 15)                       30,000 Direct Labor cost (2,000 x 45)                       90,000 Variable MOH (2,000 x 25)                       50,000 Total variable costs                    170,000 Contribution Margin   $                  70,000 Note: Fixed MOH is no relevant here since cost is fixed opto 22,000 units and firm has excess capacity. Conclusion: The company should accept the special order because it will increase inco-me by $70,000.

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